If you have bad credit or lack a credit history, you’re not alone. About 35 percent of consumers have a credit score below 669, which is considered subprime, according to Experian. For these Americans, it may be difficult to get a loan or a credit card. Yet in order to build credit, you need to use a credit product from a lender that will report your payments to the major credit bureaus. It’s a catch-22.
Luckily, there are products available to people with bad credit that can help build credit or establish a credit history. While you may not get access to perks like cash back or travel rewards, you will be able to raise your credit score, which will open the door to more credit opportunities in the future.
Why Is it Important to Build Credit?
Having bad credit can cost a fortune. When you take out a loan to buy a car or apply for a mortgage, you’ll automatically pay a higher APR than a creditworthy customer. A bad credit customer could end up paying twice as much for a car than someone with excellent credit because of how the interest adds up over the life of the loan.
And bad credit doesn’t just affect the cost of borrowing. Landlords frequently use credit scores to vet applicants, and insurers in most states determine your premiums in part based on the information in your credit report. Some employers may even run a credit check when making a hiring decision. That means bad credit can make it harder to get an apartment, a job, a car, a house, and affordable insurance premiums.
What Impacts My Credit Score?
When you make or miss a payment on a loan or credit card, lenders and issuers report that information to the three major credit bureaus. The information on your credit report is used to calculate your FICO score. While scoring can vary slightly from one individual to the next, here are the factors that typically impact your credit score:
- Payment history. This is the most important factor in determining your score. To avoid negative marks on your credit report, always make at least the minimum payment on time.
- Credit utilization. Having some debt isn’t necessarily a bad thing, but using a lot of your available credit can tank your score. Experts generally recommend keeping your credit utilization ratio (your debt balance divided by your available credit) below 30 percent. For an excellent score, you should keep it below 10 percent. To improve your credit utilization, work to pay down debt or ask for a higher credit limit if you have a credit card.
- Length of credit history. FICO scores take into account the age of your accounts, but people who are new to using credit can still have good scores if more important factors like payment history are in good standing. Still, you should keep your oldest accounts open and active to avoid shortening the length of your credit history.
- Credit mix. A less important factor is the different types of loans and credit products on your report. If you can handle multiple types of loans and credit cards, lenders will view that favorably.
- New credit. When you apply for a new credit card, the issuer will do a hard credit check, which will cause a small and temporary dip in your credit score. You should avoid applying for too many new credit products within a short period.
5 Ways to Build Credit with a Credit Card
Secured Cards
A secured credit card can be an excellent way to build credit. Secured cards require you to put down a deposit that typically becomes your credit limit. For example, you might pay $500 to access a $500 credit limit. If you default on your payments, the issuer can keep your deposit. This allows issuers to extend secured cards to people with bad credit without risk. On the other hand, if you buy something with your credit card each month and pay off your balance on time, the issuer will report your payments to the three major credit bureaus. As you make consistent payments, your credit score will increase.
Some issuers will increase your credit limit beyond your deposit after you make several payments on time, and some will let you upgrade to an unsecured card and return your deposit once your credit score improves.
Starter Credit Cards
There are some unsecured credit cards, which don’t require a deposit, that will accept applicants with fair credit. However, these usually come with high APRs and sometimes annual fees. They also typically have low limits and don’t feature the same rewards as unsecured cards for creditworthy customers. Still, if you have at least fair credit, it’s worth looking into options for unsecured cards.
Student Cards
If you’re enrolled in college and your credit history is still very limited, you may qualify for a student credit card. If you’re under 21 years old, you’ll need to show proof of income, even if it’s just from part-time jobs or support from your parents, or you’ll need a co-signer. Student cards typically have low limits, but they can increase as you build credit. Some student cards may even come with cash back rewards. However, they’re typically more difficult to qualify for than secured cards.
Retail Cards
If you don’t qualify for a rewards credit card because you have fair credit, consider looking into retail cards, which are typically easier to qualify for than regular unsecured cards. Open-loop retail cards, which can be used anywhere, are often more difficult to qualify for than closed-loop retail cards, which can only be used at one particular store. Both types of retail cards often come with perks, discounts, or rewards. Pick a store you shop at frequently so that you’ll make payments each month, and you’ll start to see your credit score improve.
Credit Cards with Co-Signers
Very few issuers provide credit cards to borrowers with a co-signer, but there are a few that will. If you have a creditworthy friend or relative, they can cosign on a credit card for you, and the issuer will use their credit score to determine whether you qualify and what your APR will be. The caveat is that the co-signer is also on the hook for the payments, so if you default, you could hurt their credit score as well. Choose a financially responsible co-signer and ensure you make your payments on time.
Becoming an Authorized User
Another way to build credit is by becoming an authorized user on someone else’s account. The account will be added to your credit report, and your credit score will increase as the primary cardholder makes on-time payments. You’ll be allowed to make purchases, which the primary cardholder may be able to limit, but you won’t be financially responsible for the payments. If you’re going to go this route, come up with an agreement about how much you can spend and how you’ll repay the primary cardholder. And always ensure the account holder will be responsible enough to keep up with the payments.
Tips for Building Credit with a Credit Card
- Make a small purchase each month. In order to build credit, it can help to actually use your credit card. But you’ll likely have a low limit, and since you want to keep your credit utilization low, you should just spend a little bit of money on your credit card each month.
- Make multiple payments each month. If you want to make purchases throughout the month with your credit card, it’s a good idea to make multiple payments throughout the month to keep your credit utilization low.
- Set up automatic payments. Keeping up-to-date with your credit card payments is the best way to build credit. If your credit card issuer offers automatic payments, sign up so you don’t forget to at least pay the minimum.
- Ask for a higher limit after six months. Many credit card issuers will give you a higher limit if you can show that you’re able to keep up with the payments. With a higher limit, you can use your card more often without worrying about a high credit utilization ratio. Check in with your credit card issuer after six months to see if you’re eligible for a higher limit.
FAQ
Can You Get Denied for a Secured Card?
Yes, it’s possible to be denied for a secured card, even if you put down a deposit to secure your credit limit. Usually, this will occur because you don’t have proof of enough income or because you have a bankruptcy on your record. You may also be denied because your credit score is too low or because you have delinquent accounts already. However, there are some credit cards you can apply for that don’t require any credit history or even a traditional credit check.
How Long Does it Take to Build Credit with a Credit Card?
If you have no credit history, it will take about six months of credit activity for a score to be calculated for you, according to Experian. If you have bad credit, expect it to take three to six months to start seeing improvements in your score. And remember that to see any improvement at all, you need to make monthly on-time payments, keep your debt balance low, and avoid applying for too many new credit products.
What Credit Score Do I Need for an Unsecured Credit Card?
There’s no minimum score for some unsecured credit cards, but you’re much more likely to be approved if you at least fall into the fair credit bracket with a score of 580 or above. Some credit card issuers have a prequalification process that allows you to check your eligibility without impacting your credit score. While prequalification isn’t a guarantee of approval, it can help you narrow down your options.
Will a Prepaid Card Help Me Build Credit?
No. A prepaid card works similarly to a debit card; cash is pre-loaded onto the card for the convenience of swiping at local retailers and shopping online. The use of prepaid cards isn’t reported to the three major credit bureaus, so using these cards won’t help you build credit.
How Can I Avoid Defaulting on My Credit Card?
When you’re trying to build credit, making on-time payments is of the utmost importance. Even if you can’t pay the full balance, you should always make the minimum payment. If you’re prone to forgetting, set up automatic payments. If a payment is coming up and you can’t afford it, ask the credit card issuer to change your due date. Then, reevaluate your budget to ensure you’re able to make payments on time in the future.
How Can I Keep Track of My Credit Score Progress?
You’re entitled to a free annual credit report from each of the major credit bureaus, which you can access at AnnualCreditReport.com. You should go over your report in detail and dispute any errors that might be negatively impacting your score. If you’re new to building credit, you may also want to use a free service that allows you to check your score once a week. Some credit cards also offer credit score access, so you can check your score directly from your credit card account.
The Bottom Line on Building Credit with a Credit Card
If you’re in over your head with debt, you may need more than a credit card to help you rebuild your credit. A nonprofit credit counseling agency could help you get control over your finances so you can start making on-time payments and lowering your debt balance. But if you’re just looking to establish a credit history or recover from some past negative marks, consider using a credit card to build credit. Here are your options in order of the easiest ways to qualify for credit:
- Become an authorized user or use a co-signer
- Use a secured card or a student card
- Use a starter credit card or retail card
Once you’re approved for one of these options, use your card responsibly. Never put a purchase on a credit card that you can’t afford to pay for in cash. And be sure to always make your payments on time. Keep an eye on your credit score, and once it’s in better shape, consider applying for an unsecured card with a higher limit so you can continue your progress.