For better or worse, it’s very difficult to get by without a solid credit score. Unfortunately, no credit is just as detrimental as bad credit in many cases. But why is it so important?
According to Nerd Wallet, “Your credit scores determine a lot more than the loans you can get and the interest rates you pay. Insurers use credit scores to set premiums for auto and homeowners coverage. Landlords use them to decide who gets to rent their apartments. Credit scores determine who gets the best cell phone plans and who has to make bigger deposits to get utilities.”
It’s essential that you start building a solid foundation for your financial future by establishing good credit. Let’s take a look at the best types of cards for beginners.
Before You Get a Card
The very first thing you need to do before applying for a credit card is to open checking and saving accounts in your name. Even if you don’t have a lot of money right now to deposit in them, you’ll need banking details in order to move forward with your credit card application and eventually pay your bill.
Although credit card companies will start sending out “pre-approved” or “pre-selected” offers in the mail the moment you turn 18, make sure that you are in a stable enough financial position to be able to pay off your balance each month. Before you sign up for anything, have a conversation with your parents or guardians. You might think that you’re ready for the adult responsibility of a credit card, but there may be a good reason to wait until you’re a little older. You should also talk about what will happen if you can’t pay your bill. Will your family be willing to bail you out? Do they have limits on how much they’ll pay or how often they’ll cover your expenses?
Finally, you should have an established source of income, even if it’s just a part-time job. You’ll need to list your estimated annual income on most credit card applications. As The Balance explains, “Federal law requires adults younger than 21 to have verifiable income before they can be approved for a credit card without a cosigner. Income must be from a job.”
If you don’t yet have a job, there are a few options to start building your credit history right now.
Beginner Credit Cards You Can Get Without a Job
It can be tough to get a credit card with favorable terms when you have no credit history—and almost impossible if you don’t have a steady income. To get a jumpstart on your credit journey, you could be added as an authorized user to someone else’s credit card.
Be warned that you could potentially damage the primary user’s credit score if you use your card irresponsibly. It’s a big risk for the primary user to take and requires a great deal of trust. On the other side of the equation, be wary of signing up as an authorized user with a family member who isn’t very responsible with their money. Their bad habits could negatively impact your credit history.
Despite the risks, becoming an authorized user on an established account is one of the most common ways to help a loved one build their credit history. As an alternative, a responsible adult could serve as a co-signer for your new card.
Here’s how CapitalOne explains the benefits of co-signing for a card:
Co-signing for a credit card is one way to help a loved one improve their chances of being approved—especially if they’re building or rebuilding their credit. A co-signer could also help the applicant get more favorable terms than they might on their own.
You’ll have a little more autonomy with a co-signer rather than as an authorized user on someone else’s account. If you stumble and miss payments, however, the co-signer will be responsible for your debts and can see their own credit score damaged.
Finally, you could apply for a joint credit card with a loved one. Joint credit cards are more usual between spouses or partners who live together, but they can be useful for recent grads who are just starting out, too. Joint credit cards carry similar risks for both parties as authorized users and co-signers.
Store Credit Cards
For several generations of young people, getting a store credit card—often one for a department store like Sears or Montgomery Ward—was the first step in building credit. However, the era of the department store credit has mostly ended. Sure, there are plenty of retail store cards to choose from—in fact, you can hardly make a purchase without being offered a credit card these days. But most of those cards offer punishing interest rates.
Unless you are absolutely certain that you’ll pay off the card in full every month, you may find that a store credit card does more harm than good. In addition, you won’t be eligible to earn rewards other than store-specific coupons and discounts. While many regular credit cards offer cashback, for example, store cards rarely do. That’s not necessarily a dealbreaker, especially if you’re a regular shopper at the store. However, store credit cards simply offer more limitations than other types of cards.
Student Credit Cards
If you’re currently enrolled at a college or university, you may be eligible to apply for a student credit card. You’ll still need to have a source of independent income (or a co-signer), but the barrier to entry is typically much lower for student accounts.
Look for cards without an annual fee. Check the APR—that’s the interest rate—and compare it to the current national averages:
- Fair or New Credit: 23.05%
- Good Credit: 18.84%
- Excellent Credit: 13.1%
Be sure that you understand the penalties and fees for late payments before you sign on the dotted line. Compare the perks each card offers, too. You may find cards with welcome bonuses, cashback offers, and other rewards that make one card more tempting than another. You can comparison shop for student credits online; Forbes put together a handy list to help you get started.
What happens to your student credit card after you graduate? In a word, nothing. Some credit card companies will automatically reclassify your account, but you should let them know that you graduated anyway. It’s a smart idea to keep the account open and in good standing, though, because the age of your oldest account has an impact on your credit score. The longer your credit history, the better it is for your finances.
Secured Credit Cards
It’s a classic catch-22: in order to build your credit, you need a credit card. But to get a credit card, you need a good credit score. One solution is to apply for a secured credit card. Here’s how they work.
Unlike other types of credit cards, a secured card requires a deposit. This serves as collateral for the lender in case you default. The credit limit on your card is usually equal to your deposit; if you fail to pay your balance and the account defaults, the issuer keeps your deposit. If you owe more than the deposit amount, your account can still be sent to collections. This would be very damaging to your credit history and should be avoided at all costs.
Secured cards are often issued to people who are trying to rebuild their credit after a financial disaster, but new credit card users may also want to consider one. It’s a lot easier to get approved for a secured credit card when you have bad or non-existent credit. Unfortunately, there can be some pretty major drawbacks to these cards.
Because their borrowers are considered higher risk, secured credit cards are more likely to charge higher interest rates as well as maintenance fees. Essentially, you could end up paying for the privilege of having a credit card. The penalties for missing a payment are often steeper for these cards.
A secured credit card isn’t the same thing as a prepaid credit card. Prepaid cards might be labeled as “credit cards,” but they function more like debit cards attached to a bank account.
Read More: The Best Cash-Back Credit Cards of 2021
Bank Credit Cards
When you open a checking account, you’ll be issued a debit card. This allows you to spend the money in your account without carrying cash and to make purchases more easily online. Visa and Mastercard are the two biggest processing networks in the United States, and most banks partner with one of them. You’ve probably got a debit card in your wallet right now!
A debit card is not a credit card. It will not impact your credit score. While some banks offer overdraft protection—meaning that they will cover a purchase that exceeds the amount of money in your account, for a fee—the account activity isn’t reported to any of the major credit bureaus.
Many banks offer credit cards in addition to debit cards. You may find it easier to get approved if you already have a financial relationship with a bank. A healthy checking account without a lot of overdraft charges will go a long way to getting your application approved.
Bank cards may offer more robust bonuses and perks than other cards on this list, making them more appealing than many other introductory credit cards. Unfortunately, they rarely offer welcome bonuses to new users. This type of card may charge lower overall interest rates but apply additional maintenance or annual fees. As always, read the fine print before you proceed with any credit card application.