Building credit from scratch can be difficult. With no credit history to assess, a credit card issuer has no way to determine the amount of risk you pose. That makes it difficult, if not impossible, to qualify for standard credit cards.
Fortunately, there are three other varieties of credit cards that can come to the rescue since they are far easier to acquire.
- Secured Credit Cards – With a secured card, you supply a deposit to the card issuer that determines the amount of credit you receive. This removes the risk for the card issuer. By using your cash to back a credit card instead of a debit card where purchase amounts are automatically deducted from your account, you can receive a regular bill and establish a solid repayment history.
Issuers of secured credit cards often have plans that allow you to upgrade your credit card to a more traditional card after a certain amount of time with an excellent payment record. Some card packages come with perks in order to persuade you to stick with that issuer as you improve your credit over time.
- Retail Cards – Almost every big-box and department store has a store credit card that they will offer you to secure deals or percentages off purchases. Given the extra incentive, retail stores are more likely to give you a credit card with little if any scrutiny of your credit record. If you regularly shop at a particular store, these rewards can be quite impressive.
However, you must beware the lure of constant deals and the temptation to purchase more than you need or can pay for. Stores will try their best to get you to increase your account balance. Don't fall for it.
- Gas Cards – Gas cards may be the most helpful at rebuilding your credit, since you are more likely to frequently use the card and do so for relatively small purchases compared to a department store card. (If you manage to rack up a bill that you can't pay by loading up on gas station snacks, drinks, and lottery tickets, you have risk issues that go beyond any assistance that credit cards can provide.)
Gas station cards may also come with perks and rewards, so evaluate your choices and pick your favorite card representing stations along your typical routes. Don't drive out of your way and waste gas (and money) just to establish credit.
All three types of cards can help you establish credit, but only if you use them correctly. They can just as easily harm your credit through misuse, especially if they represent your first exposure to the credit bureaus. It's hard to overcome a bad first impression in any field, and credit is no different.
Before you begin, verify with the card issuer that they do report to the major credit bureaus. Once you have your card in hand, keep your monthly charge amounts small to make it easier to pay off and to keep your credit utilization low. Always pay the bill on time and pay it in full — avoid carrying a balance whenever possible.
With proper usage over time, the above credit card types can help you establish robust credit that you will need later in life for larger purchases like an automobile or a home. Proceed with care, because the good habits you learn while building credit can help you maintain a good credit rating throughout your life.
If you want more credit, check out MoneyTips' list of credit card offers.