Making a decision on a credit card facility for the first time is an exciting and unnerving experience. With so many lenders to choose from, how do you select the right one?
Many Americans think of credit card facilities as a blanket service. In other words, they feel that there is no difference in the facility between lenders.
However, the reality is that credit cards are very different from lender to lender. Companies offer different interest rates, introductory APR discounts, and reward programs, to name a few. If you’re looking for a credit card, lenders tailor their products to suit varying income groups and credit scores.
What Are the Benefits of Owning a Credit Card?
- 1 What Are the Benefits of Owning a Credit Card?
- 2 The Best Credit Cards for People With No Credit
- 2.1 Capital One “QuicksilverOne” – The Best Credit Card for Flat-rate Rewards
- 2.2 Petal Cashback Credit Card
- 2.3 Citi Double Cash – The Credit Card with the Best Repayment Incentive
- 2.4 Capital One Secured – The Best Credit Card for People with Poor to Average Credit
- 2.5 OpenSky Secured Visa Card – The Best Credit Card with No Credit Check
- 3 How Does Your Credit Score Affect Your Credit Card Application?
- 4 Use a Credit Card to Build Your Credit
- 5 Important: Never Pay Only the Minimum Amount
- 6 The Problem with Your Credit Report and How It Affects Your Credit Card Application
- 7 Your Income Matters
- 8 Other Factors Included in Your Credit Card Application
- 9 Your Credit Card Options if You Have No Credit History
- 10 Signing Power
- 11 Wrapping Up – The Dangers of Taking Credit You Can’t Afford
Owning a credit card allows you to make purchases on credit. If you’re stuck with a shortfall in your monthly cash flow, a credit card can get you through until your next payday. Credit cards are more convenient than carrying cash, and they present a lower risk of theft of your money as well.
With a credit card, you also get incentive rewards for swiping your card when you go shopping or fill up with gas. Cashback is the most popular credit card rewards facility in America, with lenders offering anywhere between 1 to 3-percent back on your purchases.
Credit cards allow you to build your credit score with the credit bureaus.
This strategy gives you more leverage with lenders when you want to open other lines of credit, such as a mortgage.
The Best Credit Cards for People With No Credit
We reviewed the best credit cards available and came up with this list. Each card on this list has unique characteristics that define its utility and costs. Review our choices and select the card that you think will enhance your finances and lifestyle.
Capital One “QuicksilverOne” – The Best Credit Card for Flat-rate Rewards
We like the cashback rewards program with this card that pays a flat rate of 1.5-percent back on all purchases. This incentive makes it a great card if you don’t have the attention span to keep up with rotating categories in the Discover it program.
If you manage to make five monthly payments on time, Capital One will automatically extend your credit facility. However, this card charges an annual fee, and you’ll need to spend at least $2,600 during the year to offset the charges. There is no introductory APR on this card, and the APR is higher than most other cards.
Petal Cashback Credit Card
Petal designed this card for people who are looking to build their credit score quickly. The company does not market the card directly to students. However, it’s suitable for anyone with no credit history looking to build their FICO and VantageScore credit profiles.
Cardholders can earn additional cash back after making 6 on-time payments (when the cash back increases to 1.25%) and again after six additional on-time payments (when the cash back increases to 1.5% cash back).
The facility also has no account fees, and no foreign transaction fees, making it the ideal choice for students that travel.
Citi Double Cash – The Credit Card with the Best Repayment Incentive
With a Citi Double Cash Card, you get double rewards. This credit card facility rewards you when you make your purchases, and then provides a second reward when you pay your balance in full. First-time credit card users need to learn how to settle their balance at the end of every month to instill good spending habits.
With the Citi Double Cash Card, you get the perfect incentive to learn prudent financial habits with managing your credit facility. Citi will also waive your first late fee if you experience difficulty with making a payment.
This card facility also comes with Citi Private Pass, giving you access to special events, such as presale sports and concert tickets. With the Citi Price Rewind feature, you get an automatic adjustment on any purchases if the price falls on any items you purchase with your card within the last 60-days.
Capital One Secured – The Best Credit Card for People with Poor to Average Credit
The Capital One Secured Card allows people with bad credit to apply. If you have a debt collection notice or a late loan payment on your credit report, it won’t affect your ability to get approved for this card.
You’ll need to pay a security deposit to access your credit limit. Capital One accepts $49, $99 or $200 as a security deposit, and your limit depends on your level of creditworthiness. After making five monthly payments, Capital One will increase your credit limit.
However, it’s important to note that this card comes with a high APR. This interest rate makes it expensive if you don’t pay off your balance in full every month.
OpenSky Secured Visa Card – The Best Credit Card with No Credit Check
The OpenSky Secured Credit Card is the best choice for anyone that has a subprime credit score. The lender completes no credit checks on your application. As a result, OpenSky guarantees your approval for the facility; all you need to do is make a $200 security deposit.
If you have a bad credit report, or you filed for bankruptcy, then the OpenSky Secured Card is your best choice. If you want a higher limit on your facility, OpenSky allows you to make a security deposit of up to $3,000.
OpenSky also reports your payment activity to the bureaus, allowing you to build your credit score. This feature makes this credit card ideal for anyone looking to build their credit after experiencing financial trouble. Unfortunately, you don’t have the option of converting this card into an unsecured facility.
How Does Your Credit Score Affect Your Credit Card Application?
Everyone has a credit score. The three big credit bureaus, Equifax, Equestrian, and TransUnion, receive reporting from credit agents, such as banks. They use the reporting to compile your FICO or VantageScore credit score. Almost 90-percent of lenders examine your FICO score when assessing you for a credit card or personal loan.
Your FICO score contains five weighted factors, which all determine your level of creditworthiness. If you have a credit score that’s between 800 and 850, you have the best credit. Banks will trip over themselves to secure your business, and you’ll rarely have any issues with applying for credit cards.
People with an 800+ score also have more leverage with the lender, and this allows them to negotiate any interest charges to a cheaper rate. For instance, you might receive a point or two less than the prime interest rate when applying for a mortgage.
Those people with a credit score between 681 and 799 have an average credit score rating, and lenders consider those with a score below the 670-mark, as subprime borrowers. With a subprime score, you’ll struggle to find any lender willing to provide you with credit. Those that do decide to deal with you will offer you higher interest rates on any facility.
Typically, first-time credit card applicants are either students or young people entering the workforce. These individuals have no credit history, but there are cards designed to cater to this segment of the market. Banks offer secured credit card facilities that allow the applicant to place a deposit on their credit card account as collateral. The bank then issues the card to the customer, and they use it in the same manner as an unsecured card.
However, some people may have never owned a credit card before, but they have an excellent or average credit score. These individuals won’t find it challenging to secure a credit card facility. However, the APR may vary from lender to lender, depending on the customer’s income and credit score.
Use a Credit Card to Build Your Credit
One of the best reasons for using a credit card facility is that banks report your payment history to the credit bureaus. If you take a card facility that reports to all three bureaus, then you can build your credit score quickly. When using your credit card to increase your credit score, adhere to the following rules.
Watch your credit utilization ratio – This ratio describes the amount of credit available on your credit card facility. Banks and credit bureaus don’t like to see you using more than 30-percent of the total credit available on the card. Therefore, if you receive a limit of $3,000, make sure you don’t spend more than $1,000 during the month.
Always pay in full – Pay your bill in full at the end of every month, and pay it on time. The banks report your behavior to the bureaus. If you always pay on time, and in full, they are likely to boost your credit score and extend your credit facility.
Important: Never Pay Only the Minimum Amount
Regardless of whichever card you choose, always pay your outstanding balance in full at the end of the month. As mentioned, first-time credit cards come with the highest APR. Therefore, if you only pay the minimum amount on your card at the end of the month, you’ll quickly accumulate interest on your outstanding balance.
The interest adds up fast, and it can leave you in a permanent cycle of debt. Always ensure that you pay attention to how you manage your credit card facility. If you use it the right way, it can be a valuable tool for building your credit. However, abuse or misuse the credit card, and interest will choke your finances to death while your credit score crumbles into subprime territory.
Credit cards are a valuable financial tool, with a propensity for misuse. Avoid maxing out your card, and keep to the 30-percent utilization rule.
According to data from the Federal Reserve, American consumers owe more than $1,04-trillion in credit card debt. That’s a staggering figure accounting for nearly 5-percent of United States GDP. However, more than 62-million Americans don’t qualify for a credit card, due to poor credit history that generates a weak credit score.
Getting approved for a credit card with a poor credit score is difficult – However, because it’s challenging, does not mean it’s impossible. Here is a brief guide to successfully applying for a credit card facility, even if you have a poor credit score, and next to no credit history.
The Problem with Your Credit Report and How It Affects Your Credit Card Application
When you apply for a credit card with a bank or online lender, they run a “hard inquiry” on your credit report. Your credit report brings up your past credit history, including your payment history, any collections or judgments in your name, as well as outstanding amounts owed, your credit mix, and the duration of your credit facilities.
All of these factors combine to calculate your credit score. Recent studies show that more than 70-percent of American adults have a credit score of over 704, which is considered the benchmark by banks and lenders for a good credit profile. However, if you are one of the unfortunate people who have a credit score under 580, then you’ll find it challenging to apply for any credit facility.
Lenders view your credit score as a risk profile for lending you money. If your score is below the 580-mark, they see you as high risk. Between 580 and 680 is considered average, and above 800 is the gold standard. If your credit score is 800+, then lenders will throw money at you, and you have more room to negotiate better rates on your accounts.
However, what do you do if you have a credit score of less than 580? Is it still possible to get a credit card facility?
Your Income Matters
When considering your credit card application, lenders also check your income, as well as any outstanding credit, to compile your debt-to-income ratio. If you have a DTI of 30-percent or more, then lenders will also hesitate to loan you money. This ratio means that if you have a monthly income of $6,000, and outstanding debt payments totaling more than $2,000 per month, the lender is more likely to deny your request for a credit card.
The Credit CARD Act of 2009 came into play after the Great Financial Crisis of 2008. Before the crisis, lenders were quick to allow anyone to apply for a credit card facility, regardless of their age, income, DTI, or credit score. As a result, credit card companies experienced massive leverage by consumers looking to obtain credit card facilities. After the crash, many Americans defaulted on their credit card facilities, exacerbating the effects of the crisis on the banking sector.
The arrival of the Credit CARD Act of 2009, was set to ensure that banks did not put themselves in this position again. Today, any applicant under the age of 21, requires proof of income when applying for a credit card, along with a decent credit score. If they have no credit history, and minimal income, applicants under 21-years old require a co-signer to act as surety over the account.
It takes a few years to develop a FICO credit score above the 700-level. As a result, the credit bureaus introduced the VantageScore system, which allows young Americans a chance to build their credit score over a three to six-month period. However, many lenders still rely on the FICO system when assessing the applicant.
Other Factors Included in Your Credit Card Application
When a lender assesses your application for a credit card, they may also look at other factors if you have no previous credit history. Your employment history may be a deciding factor, as well as the health of your checking account and any other investments you may have with banking institutions.
Some people are credit averse, and they prefer to save their money during the early stages of their career. If you have a solid track record of income flowing into your checking account every month, as well as other financial products such as CDs or a savings account with the same bank, then the lender may take this into account when assessing your application.
These factors demonstrate that you are competent and responsible with your finances, and if you are applying for a credit card facility with the same bank that manages your other accounts, they may decide to take a chance on you, or require that you pledge some of your capital to secure the facility and mitigate the lenders risk in the deal.
Your Credit Card Options if You Have No Credit History
There are some entry-level credit card facilities available to those individuals with no credit whatsoever.
Secured Credit Cards
A secured credit card is the most obvious choice for people with no credit history or a weak credit score. With a secured credit card, you pledge a deposit to the lender to cover the credit facility on the card. For instance, to receive a $2,000 facility, you would deposit $2,000 with the lender, which they keep in a segregated account as collateral for your credit card.
The card works in the same manner as a regular credit card facility, and you can use it anywhere you would typically use a credit card. This secured card usually has the Visa, MasterCard, Discover, or American Express logo featured on the face of the card, and the retailer has no idea that it’s a secured card.
However, people that view your credit report can see that you have a secured credit card, not that this will make any difference to a credit assessment, as lenders still regard it in the same manner as a regular credit card.
Lenders will often charge a higher APR (Annual Percentage Return) on secured cards. In most cases, it could be between 20 and 25-percent. Standard credit cards typically have an APR of 17 to 18-percent, making a secured card far more expensive on interest payments. Lenders charge this high APR to discourage you from overspending on the facility, in the hope that you’ll not want to pay the excessive interest costs.
If you default on a minimum payment, the bank or lender will close your account. The lender will not permit you to use the secured deposit funds in the segregated account to buttress your monthly payments. If you default, they close your account, and return your money, less the outstanding amount owed.
However, the drama does not end there. The lender will report your non-payment behavior to the credit bureau, resulting in further damage to your credit score. This reporting does not always work in both ways. While the lender may be quick to report you in case of default, they may not inform them about your good payment behavior, as it costs them money to file these reports.
Therefore, before you sign up for a secured credit card facility, it’s vital that you understand the APR charges involved, as well as any annual account fees. Ask the lender if they report your good payment history to the bureaus every month as well.
Student Credit Cards
If you’re a student studying toward your degree or diploma, the bank may issue you a student credit card facility. Banks realize that students need to start building their credit history so that when they graduate, they have some form of credit score before they enter the job market.
Banks and online lenders typically ask for a co-signer to provide surety over the card, to protect them in case of a default by the student.
However, student credit cards typically don’t come with high limits, and you can expect the lender to set a ceiling on your card of a few hundred dollars. This strategy helps the banks protect themselves against any default on your part.
If you have a student loan outstanding, banks may not facilitate your request for a student credit card, as you may already have too much debt outstanding. This student debt gives you a negative debt-to-income ratio, and lenders view this as high risk.
If the lender does approve you for a student credit card, then you can benefit from their reporting to the credit bureaus, and use it to start to build your credit score. By the time you leave college, you could already be on your way to the fabled 800+ credit score, allowing you to get a head-start over your peers that did not have access to this facility.
Most banks will issue this facility during your studies, and they cancel it after you graduate or drop out of college.
Retail Credit Cards
Many retailers offer their customers “open-loop” or “closed-loop” credit cards. Open-loop cards work like regular credit card facilities, allowing you to use the card at any retailer that accepts Visa, MasterCard, Discover, or Amex. The card features the logo of these firms on the face of the card, and you spend as you would with a standard credit facility.
Closed-loop cards will only work within the retailer’s range of brands, and you can use it to purchase goods and services from the retailer and pay them monthly to settle your debt. Many closed-loop cards come with 0-percent interest on purchases for periods up to 6 to 12-months, depending on how much you spend.
However, after the promotional period ends, you may end up paying deferred interest on the outstanding balance, with APRs as high as 25-percent. Some retail cards can help you build your credit score, as the retailer reports your payment history to the bureaus. However, in some cases, the retailer may only report bad payment data – leaving you with no benefit of building your credit score.
Check with the retailer’s terms and conditions, as well as reporting, before you open any of these facilities., A good example of the retail cred card, is the Amazon Credit Card, which you can use for purchases on the Amazon website. Retail credit cards also offer exclusive deals and promotions, as well as discounts and cash-rebates for spending on their platform.
Alternative Credit Cards
Online lenders are paving the way to a new era of credit cards for those people with no credit history. Companies like Deserve cards and Petal Card provide consumers with credit cards based on their employment and income history.
These credit card facilities will start you out with a small limit to let you prove that you have the financial prudence to manage your credit facility. If you default, they will close your account, and issue collections notice that will damage your credit score. These types of alternative credit cards may also come with high APRs, so be careful about signing up for these types of cards.
If you have no credit history, and your parents or legal guardian has a credit card facility, then you can apply for signing power on their card facility. The bank will issue you with a separate card that has your name on the front, giving you authorized user status over the account.
Authorized accounts have separate reporting to the guardian’s account, enabling you to build your credit score.
Wrapping Up – The Dangers of Taking Credit You Can’t Afford
Many people make the mistake of taking on too much debt when they receive their credit card. It’s important to note that the credit bureaus take your credit utilization rate into account when analyzing your credit score.
The credit utilization rate describes the amount of credit available on your facility, versus the amount used. Lenders and the bureaus don’t like to see utilization rates above 30-percent. Therefore, if you have a $6,000 limit on your card, you need to keep your spending under $2,000, to ensure that it does not adversely affect your credit score.
Many Americans make the mistake of maxing out their card quickly and then only making the minimum monthly payment. This behavior is a risky financial practice that could end up with you paying a significant amount of interest on the principal.
Keep your spending within the 30-percent ratio, and you can expect to steadily build your credit score, allowing you to qualify for a real credit card facility, as well as access to other types of credit, such as an auto loan or mortgage.