- If you are looking to get a credit card but don’t have credit, it’s important to understand how credit scores work and how lenders view creditworthiness before you apply.
- There are cards designed for those without credit, and these will have special, stricter stipulations you’ll have to follow while you build your credit history.
- Your credit card can be an excellent tool to help you establish credit and improve your score, rewarding you in the long run.
According to a recent study from the Consumer Financial Protection Bureau, about 45 million Americans don’t have a credit score with any of the major credit bureaus or have credit records that are “unscorable.” If you’re one of them, you may be trying to figure out how credit cards for people with no credit work. In this article, we’ll cover what you need to know about securing a credit card if you don’t have a credit history yet.
How Do Credit Scores Work?
Before applying for a credit card, you’ll want to understand the basics of credit scores and why they’re important. Credit scores are numbers that lenders use to evaluate your creditworthiness. Lenders have no way of knowing for sure whether you’ll keep up with monthly payments, especially at first. There is an inherent risk involved with lending, no matter if it’s for a credit card or a mortgage.
Credit scores typically range between 300 and 850. The higher the score, the more likely you are to be a trustworthy borrower. Low scores mean the lender is taking on significantly more risk. If you have no credit score, the lender has little to go on to know whether extending you a line of credit would be a reasonable and profitable risk for them to take.
There are two different types of credit scores available, FICO and VantageScore 3.0. Here’s how the credit scores break down for each:
- 800-850: Exceptional Credit
- 740-799: Very Good Credit
- 670-739: Good Credit
- 580-669: Fair Credit
- 300-579: Very Poor Credit
- 750-850: Excellent Credit
- 700-749: Good Credit
- 650-699: Fair Credit
- 550-649: Poor Credit
- 300-549: Very Poor Credit
What Influences a Credit Score?
Both FICO and VantageScore have baseline minimums needed to register a score.
For instance, you must have at least one account open for six months, as well as an account that has reported activity within the past six months, if you want to have a FICO score. The same account can fulfill both of these requirements. FICO also considers the following when determining your credit score:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- Types of credit: 10%
- New credit/inquiries: 10%
If you want to have a VantageScore, you only need to have an account with one month of activity. This activity must have occurred within the last two months. VantageScore considers the following when compiling your credit score:
- Payment history: 40%
- Credit utilization: 20%
- Depth of credit: 21%
- Balances: 11%
- New credit/inquiries: 5%
- Available credit: 3%
What does all this mean for you as you seek your first credit card without a credit history? Without much data to go on, you may not have a credit score at all. Credit card issuers may then look at other factors that aren’t captured by your credit score, such as your salary or occupation. You can expect that lenders may view your credit as riskier than someone with a proven credit history. The credit card offers they provide you will likely come with less attractive features, including higher interest rates, lower credit limits and without any rewards.
How Do Credit Cards Work?
Now that you know why credit scores matter, you’ll also want to understand how credit cards work. A credit card is a short-term loan from a credit card issuer. Every card has a credit line, which is the maximum that you can take out on the card. Typically cardholders with excellent credit scores have a higher credit line. Those with no credit or bad credit may need to put down a security deposit to secure a line of credit — more on that below.
When you use a debit card, money withdraws directly from your bank account. You can’t spend money on a debit card if it’s not already in your checking account. This isn’t the case with credit cards. Credit cards allow you to immediately make purchases or obtain cash through an advance, then pay your balance at the end of your billing cycle’s grace period, typically sometime in the next month. If your balance isn’t paid within that grace period, your credit card company will charge interest.
Unlike other loans, credit cards interest rates are compounding on an unpaid balance. This means that interest charged on your balance is added to that balance, and interest gets charged on that interest, building on itself. The only way to avoid this is by paying the balance off by your statement due date.
You’ll find that although there are many different credit cards available, your choices will be limited without a strong credit history. You can look forward to more options with perks like cashback and rewards cards when you attain higher credit scores.
Credit Cards for People With No Credit
If you have a non-existent or limited credit history, you may find yourself wondering how you’re supposed to open a card and begin building credit.
When applying to credit cards with no credit, try to keep your expectations in check.
You may be best off with a secured card at first. A refundable security deposit will be required, and that makes the lender more willing to issue a credit card without a credit history. If you make on-time monthly payments, you’ll receive the deposit back at the end of your first year. If you make timely payments and avoid late fees, you’ll build your credit to the point that you can obtain an unsecured card (one that doesn’t require a security deposit).
At first, lenders won’t extend rewards credit cards or anything of the sort. Instead, the main purpose of this card is to demonstrate that you can make timely payments and not carry a lot of debt. Access to perks like cash rewards will come with responsible card use and a strong credit history that you can establish with this first credit card.
You should note that every time you apply for a card, lenders will check your credit profile. Each time they do so, your credit report takes a hit. If you don’t have any credit, you’ll want to do your research and compare various credit card offers before applying.
When comparing card offers, be sure to read the card terms carefully. Here, you’ll find relevant card details, including things like the intro APR. You can also gain a better understanding of how lenders view creditworthiness and the positive financial habits that you can begin working on. Practicing these smart habits will pave the road for better credit terms and financial advantages down the road, including for auto loans, student loans or a mortgage.
Intro offers for cards can change over time. However, intro APRs (Annual Percentage Rate) often convert into regular APRs after the first year, so read the fine print carefully. Make sure that you find one that best suits you and your current financial situation. If the card is not right for you or you don’t feel comfortable, you can always wait until a better offer rolls around.
Lastly, if you’re a college student, you’re in luck. Many companies offer student credit cards, knowing that you likely don’t have much credit history yet. Not only do these have favorable terms, but they also come with student rewards or cashback that you can use toward a statement credit. College students should look into these cards as their first option.
Managing Your New Credit Card
One of the things that builds your credit score is utilization. Typically you want to keep this number under 30%. This means that at any one time, you don’t want your balance to exceed 30% of your available credit. Without a strong credit score, expect a lower available balance from the issuer, so you’ll have to exercise extra caution. If you put a few hundred dollars toward your $1,000 credit line, for example, your utilization figure may be high and that will negatively impact your credit score. If you have a secured card, consider adding an additional deposit to increase your credit line, even if you don’t plan on using the funds.
Since you’ll have a low credit limit at first, you may want to use it for subscription services like Spotify, Netflix, Amazon Prime, or your cell phone bill. Predicting these recurring charges is easy, you can schedule automatic payments, and the small amounts will keep your credit utilization low. You can schedule automatic payments, and you can download your card’s mobile app for online access so that you can make payments quickly.
Avoiding late payments is necessary if you’re building credit. Remember that the highest impact to your credit score is payment history. Although it’s possible to build credit without a credit card, a credit card account helps tremendously.
Credit Cards Rewards to Come
What can you expect when applying for your first real credit card? Expect to receive many credit card choices but most likely will have a higher APR, lower credit limits, and fewer rewards — at first. After comparing credit card offers, choose the card that suits you best, perhaps with a neighborhood bank or credit union where you work or with an online lender with attractive terms and great reviews. Do your research first, then apply with a few lenders within a short period to minimize any negative impact from these credit inquiries on your future credit score.
Ultimately, the best credit card is one that you use as a financial tool to build credit history and one day reap the rewards. Credit cards can provide you flexibility as you shop or travel, offer fraud liability protection and monthly reporting, and allow you to secure a car rental or vacation rental. Manage your credit wisely by keeping your credit utilization low and automating your payments so you never have a missed payment. With responsible use, you should find yourself way on the way to a credit card that offers better rates, reward points or cash back, but surely a positive credit history that will come with its own rewards.