Using a credit card responsibly can be one of the most effective ways of building credit. However, it's not uncommon for first-time credit card seekers to run into challenges when trying to get their first card.
In this article, we'll share some tips on how to obtain your first credit card, as well as offer some alternative ways to establish credit if you choose not to, or are unable to, get a traditional card.
The challenge for first-time credit card seekers
Getting that very first credit card can be difficult. Author and credit expert Michelle Black says, "Without any existing credit history, a young person will have very limited options when applying for his first credit card." She goes on to say that many cards have qualification requirements that exclude applicants without credit histories.
If you're a first-time credit card seeker, this may sound like a catch-22. How are you supposed to begin building your credit history if so many credit card providers refuse to lend to those with no credit?
Rest assured, there are ways to get a card without any credit history.
1. Get someone to cosign.
One of the best ways for young adults to get a credit card without any credit history is finding a close friend or family member with good credit to cosign for them.
Cosigning is when someone agrees to take on the responsibility of your credit card. This can make you less high-risk to lenders and may increase your chances of getting that first card.
However, cosigning isn't without its own set of risks -- both for you and your cosigner. If you miss a payment, for example, the lender can go after the both of you. This may hurt your cosigner's credit score as well as your own.
Plus, failing to pay on time can result in an awkward and tense situation and potentially damage the relationship you have with your cosigner.
2. Consider getting a secured credit card.
It's important to understand the difference between "unsecured" and "secured" credit cards before you apply for either type of card.
Unsecured cards are the typical credit cards that most people own. However, these type of cards can be difficult to get if you don't have a good credit score or have little or no credit history.
Secured cards, on the other hand, operate a little differently. Secured cards are linked to a deposit account that functions as a security and fail-safe for the lender. If you can't pay back the balance on the card, the payment can be extracted from your deposit. And the amount of the initial deposit is usually the credit limit of the secured card, so even if you start making late payments, the lender knows the deposit money can cover anything you charge.
Keep in mind that a secured credit card is not the same thing as a prepaid debit card, which has money loaded onto it and doesn't operate on credit. You can still charge to a secured card; the moneyed account simply acts as a safety net if things go wrong. And it's this safety net that makes banks more willing to issue secured cards to first-time credit card seekers.
However, this doesn't mean that you can miss payments without consequence. You aren't protected by the deposit; the lender is -- so any missed payments could still negatively affect your credit score.
3. Consider getting a retail credit card.
If you've ever been to a major department store like Macy's or Target, you've likely been asked if you'd like to sign up for their store credit card. This can be an appealing option for people seeking a first-time credit card.
Retail cards are usually easier to get than traditional credit cards, as retailers are more willing to take the financial risk than traditional lenders. This is because the store wants you to shop there often, and they want to help finance your purchases. Retailers will often add perks to their cards to sweeten the deal. The Target®REDcard, for example, lets you save five percent on most Target purchases made with the card.
However, there are some serious downsides to most retail cards, which may make you think twice before acquiring one. Compared to traditional credit cards, retail cards can:
- Carry substantially higher interest rates. As of October 2015, the typical interest rate for a non-retail card can be around 15 percent, while the typical interest rate for a retail card can be around 20 percent. While a five percent difference may not seem like a lot, if you plan on carrying a balance on your card, the amount of interest you'd have to pay with each type of card could vary significantly.
- Be accepted at the issuing retailer only. While cards from major retailers often use big credit card brands like Visa or MasterCard, both of which are widely accepted, many smaller retailers only offer credit cards for in-store purchases, which can severely limit your purchasing and credit-building options.
So if you're looking to acquire a retail card, make sure you're fully aware of these pitfalls.
While secured and retail cards are some of the most common ways to build credit, they aren't the only ways. Here are some alternative options for establishing credit:
- Get your name on your utilities bill. While not every provider reports these payments to the bureaus, if yours does, making utilities payments in your name can be an easy way to build your credit.
- Ask for your rent payments to be reported to the credit bureaus. In order for your rent payments to be reported to the credit bureaus, you may want to ask your landlord to sign up for a service like RentTrack - an online service that allows you to pay your rent online and reports those payments to the three credit bureaus.
- Obtain a personal loan. Even if you don't have the credit history to get a credit card, you still might be able to obtain a small personal loan from your bank or credit union. Secured loans will typically be the easiest ones to get.
Accomplishing any one of these things (or all of them) could help you build your credit. And once you've begun building a healthy credit history, you'll be more likely to be eligible for an unsecured card in the future.
Acquiring your first credit card and building credit can be difficult, but it's possible.
Getting a secured card or retail card or asking a close friend or family member to cosign are all ways to get your first credit card. Alternatively, employing one of the methods mentioned above could help you build enough credit to get you approved for an unsecured card in the future.
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