You just graduated from college, and you’re ready for your first year of full-fledged independence. You go to rent your first apartment without a roommate, excited at the prospect of finally living alone. But something perplexing happens: You are denied for having no credit history. “But wait,” you think, “I have a checking account and I regularly paid rent in college. Don’t these count?”
Although paying monthly rent on time and having a relationship with a bank can show your financial stability, they don’t always contribute directly to your credit history. When it comes to building credit, you need to prove your acumen as a borrower. This could be done through a loan or a credit card.
If you’ve never had a credit card or loan in your name and therefore have no credit, don’t worry. You’re not alone. In fact, 1 in 10 Americans — around 26 million people — do not have a credit history.
There are many factors for why you might have no credit. If you’re a college student or recent college graduate who always had a parent manage your finances, such as taking out an auto loan for you, you might have no credit. Or, if you’ve relied solely on your debit card because people warned you about the dangers of having too many credit cards, you might also have no credit.
The good news? It’s fairly simple to begin building your credit history. One of the best ways to get started is by opening your first credit card. Below, you’ll find everything you need to know about how to get a credit card with no credit.
Why Is It Important to Have Credit Cards?
There are several reasons why it’s beneficial to have credit cards, but the most important reason is because credit cards show you can manage borrowed money. Paying off your balance in full each month shows a prospective lender than when given a line of credit, you are responsible and make your monthly payments on time.
Because credit cards allow you to establish credit history, they allow you to have a credit report and potentially a FICO credit score as well. Credit scores are crucial for many things. If you’re trying to take out a mortgage, for example, having a good credit score is imperative. Having a good credit score is also important when trying to secure auto insurance, open your own cell phone plan, or rent an apartment.
It’s worth noting that not everyone who has a credit report has a credit score. In fact, 19 million Americans have a credit report, but no credit score. To have a credit score with one of the three major credit bureaus, which are Equifax, Experian, and TransUnion, your credit history must include recent activity, which a credit card can provide.
How to Get a Credit Card With No Credit
If you have no credit, you might be worried about getting your first credit card. But luckily, there are countless different types of credit cards you can obtain with no credit. Below are several ways to get started.
1. Get a Prepaid Credit Card
Prepaid credit cards are a great way to begin building your credit. A prepaid card works like this: You load a certain amount of money onto the card upfront, say $500 or $1,000. Once that amount runs out, you reload the card.
With prepaid cards, you’re not actually borrowing any money like you would with a traditional unsecured credit card. Because it’s your money on the card, you don’t run the risk of spending more than you can pay off when your bill is due.
Prepaid cards can be obtained from most major banking institutions. Just know that not all prepaid cards get reported on your credit history. Check with the credit card issuer upfront to see if the card you’re considering will help you build your credit history.
2. Open a Secured Credit Card
Secured credit cards are one of the most popular routes people take when trying to build their credit.
With a secured card, you have to put down a certain amount of money upfront, say $200 or $500, as collateral. The amount you put down is treated like a security deposit of sorts that also serves as your credit limit. When you pay off your credit card bill, you’re entitled to getting this “security deposit” back.
One major benefit of a secured credit card is that if you use it responsibly for a long enough period of time, you could have the option of converting it to a traditional, unsecured credit card.
Before opening a secured credit card, make sure the card in question will report your credit history to the three major credit bureaus. Also, check the card details to make sure the card doesn’t come with any unnecessary fees, like annual fees and foreign transaction fees. There are a lot of secured card offers out there, so make sure you do your due diligence.
3. If Possible, Leverage Your Status as a College Student
Current college students might be able to obtain special student credit cards. These cards are designed to help college students build credit history. Student credit cards typically have low credit limits, but many come with cash back perks and 0% intro APRs. (Cash back credit cards offer users statement credits for spending a certain amount of money.)
4. Become an Authorized User on Someone’s Credit Card
One way to begin growing you credit history is by having someone else, such as a spouse or parent, add you as an authorized user on one of their credit cards. Being an authorized user won’t have the same impact as being the primary user, but it will allow you to grow your credit history in small ways.
5. Open a Credit Card at Your Favorite Store
Store credit cards are typically easier to obtain than traditional credit cards because they have lower credit limits. But because they are easier to obtain, they often come with less-favorable terms, and therefore responsible card use is imperative if you open a store credit card. These cards often have higher interest rates than traditional credit cards, so make sure you pay off your balance in full each month.
Many gas stations have credit cards, too. Both gas cards and store credit cards can be great ways to build credit history.
Things to Keep in Mind Once You Have a Credit Card
Once you open your first credit card, it’s important to keep several things in mind in order to begin establishing excellent credit.
Pay Your Credit Card Bill on Time Each Month
It’s important to handle your first credit card carefully. You’re growing your credit from scratch, so you want to start off on the right foot. Set up autopay or put due date reminders on your phone’s calendar so that you remember to pay your bill on time each month. If you cannot pay your entire balance each month, make sure you make at least the minimum monthly payment. This is critical for building a good payment history.
Treat Your Credit Card Like a Debit Card
People often hold the belief that credit cards can be dangerous. This is because some people treat their credit limit as spending money and eventually spend more than they can afford. But a higher credit line doesn’t mean you have more money to spend. Treat your credit card like a debit card by only spending as much as you can afford.
Avoid Credit Cards With High Interest Rates
Although we all like to think we will open credit cards and make our payments on time and in full each month, that’s not always the case. Unforeseen circumstances like job loss or a pricey medical procedure can leave you with hefty bills you cannot afford. Avoid having to potentially spend a lot in interest by only opening credit cards with low interest rates.
Look for a Card With No Annual Fee
You found a card that seems perfect. You’re qualified to open it, and the terms seem great. There’s just one catch: the annual fee. There’s no reason to spend an exorbitant amount on an annual fee when it’s easy to open up a card with no annual fee.
If this is your first or second credit card, try to select one that doesn’t have an annual fee. Annual fees are only worthwhile if you’re spending enough money each month to justify the points you’ll get in return.
Watch Your Credit Utilization Ratio
Your credit utilization is the amount of available credit you’re using on a card. For example, let’s say you have a card with a credit limit of $5,000 and your balance is $1,000. That means your credit utilization is 20%.
It’s important to maintain a fairly low credit utilization ratio when you’re first building your credit, as having a high outstanding balance could lower your credit score. The general rule of thumb is to maintain a credit utilization ratio of 30% or lower.
The Bottom Line
At the end of the day, having no credit is not as daunting as it seems. After all, it’s better to have no credit than to have bad credit. But it’s important to remember that with your first credit card should come responsible use. Credit building is a process that requires diligence and determination. If you open a credit card and either make late payments, miss your monthly payments altogether, or fail to pay your balance in full, you’ll be on the path to bad credit in no time.
If you stick to these recommendations instead, you’ll be well on your way to establishing a good credit score before you know it. Bravo!