The Best Cards to Build Good Credit

For better or for worse, it’s hard to get by in America without credit. If we weren’t able to take loans to make big purchases, like for a car or a home, very few people would make those purchases at all. And while a car loan and a mortgage are not the same thing as a credit card, you need to use a credit card responsibly in order to build up the kind of credit that makes loan agencies feel good about extending money to you.

Credit is determined based on a score compiled whenever you participate in any credit activity. To maintain good credit, you must consistently pay your credit card bills, utility accounts, medical debt, student loans, and any other loan account or regular bill on time. Your credit is then determined in the form of a FICO score.

Best Cards to Build Good Credit

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Late or missed payments and defaults will negatively impact your FICO score, which is calculated by considering how much debt you carry, how timely you are about payments, and how long you have maintained a credit balance. There are three credit monitoring agencies: Experian, Equifax, and TransUnion. They each calculate your credit worthiness slightly differently, so you actually have three different FICO scores. Most lenders use your middle score to determine whether to lend you any more money.

A bad FICO score falls in the 300-500 range, and an excellent score ranges between 700-850. Your score doesn’t need to be excellent in order to receive additional credit, but you should strive to keep the number as high as possible.

Unfortunately, it is very easy to experience a plummet in credit score due to hundreds of life factors that may temporarily affect your ability to pay down your current debt. And when that score plummets, it can affect many aspects of your life. Many apartment buildings, for example, will not rent to people with bad credit.

It takes time, but you can rebuild your credit. Note that no credit is often considered the same as bad credit when it comes time to take a loan, so if you have never managed credit before, this advice goes for you, too. The judicious use of credit cards is one of the best ways to get your number up where it needs to be. We are going to break down the ins and outs of various credit cards to help you hone your credit-building strategy.

Unsecured vs. Secured Credit Cards

An unsecured card is what most people think of when they shop for credit, but not everyone qualifies. With an unsecured card, you need not make any security deposit, and can freely spend up to your credit limit and pay that amount back in monthly payments that include interest and fees. Usually you’ll need to have at least average credit to qualify for an unsecured card. The higher your score, the higher the credit limit and the lower the interest rate for the card.

A secured credit card, on the other hand, requires a cash security deposit up front, typically equal to the amount of credit offered. This protects the issuing bank from the risk of default. However, you still need to pay your bill on time. If the lender has to use your deposit to pay your bill, your credit will plummet even further.

Secured cards often have higher interest fees than unsecured cards. To use them in the most effective way for building or rebuilding credit, make only a few small purchases with the card each month and then pay off the entire bill before the due date. This will save you interest fees.

Then, when your credit has improved significantly (usually in about a year), you can either upgrade your card to an unsecured version or close the secured account and apply for a new unsecured card. That’s when you’ll receive your deposit money back.

Capital One Secured MasterCard

Capital One is a huge lender and offers a wide variety of credit cards. Their Secured MasterCard may be a good fit for people with poor credit or no credit. It has no annual fee but does assess a high 24.99% variable annual percentage rate. You will need to make a refundable security deposit of either $49, $99, or $200 – the amount requested depends on your credit history and score.

The minimum credit line available on this MasterCard is $200, but you can push that higher by making a higher deposit. You will automatically be offered a higher credit line after making the first 5 payments on time. This rewards you as you go for responsible use. You may choose your due date for payments and the method of repayment you prefer.

To receive the Capital One Secured MasterCard, fill out the application. If approved, you’ll then be asked to make your deposit. It can take up to three weeks after approval for you to receive your credit card in the mail.

Fingerhut Unsecured Card

Fingerhut offers an unsecured card that is great for people with bad credit. There is no annual fee and the interest rate varies based on your credit score. As you use the card responsibly over time, you will automatically be offered more credit. Fingerhut reports your payment history to all three major credit bureaus.

There is also no application fee to apply for the card, and it is quick and easy to complete the application online. It only takes a few seconds after you apply to see if you qualify, what your credit limit will be, and what interest rate you can get. Because it is an unsecured card, there is no deposit.

No matter what your credit limit, be very careful not to spend more than you can comfortably pay back or else your credit will head further south. Note also that you can only use the Fingerhut card at Fingerhut and its approved partners, which are primarily florists and insurance companies.

Discover It Secured Credit Card

Another secured credit card, the Discover It is a great choice because it offers additional monitoring of your social security number to help protect you from identity theft. Like other secured cards, you must pay a refundable deposit that is equal to your credit line in order to be issued the card.

There is no annual fee, and responsible use will help build your credit score. In order to apply, you must be at least 18 years old and have a social security number and a United States address. You also need a U.S. based bank account – Discover will require that you provide the routing number.

Once approved, you are automatically enrolled in Discover’s social security monitoring, which will alert you if your number is found on any known risky site. Other nice benefits of the Discover It secured card include 1% cashback on all purchases, except those at gas stations and restaurants, which provide 1% back only up to $1,000.

First National Bank Platinum Edition Visa Card

When you are ready for an unsecured credit card, the First National Bank Platinum Edition Visa card is a smart choice because of its credit protection extras. There is no annual fee and it comes with fraud protection. That means that if your card is lost or stolen, you won’t be held liable for charges as long as you report the theft within 24 hours.

First National Bank obviously prefers not to pay for fraudulent charges, and carefully monitors the account for unusual activity so they can call you if they find something suspicious. You can also check your FICO score every month at no charge, which is awesome for people who are rebuilding. Other benefits include car rental insurance and a $25 statement balance credit as long as you make a purchase in each of the first three billing cycles.

This card is for people over 18 years old. The application requires your address, income, social security number, and bank account info.

No matter what card you get, whether secured or unsecured, careful use is what will build your credit. It is best to spend no more than you can repay in full each month, because credit card companies make their money on interest fees and late charges. If you repay your bill in full each month, you usually won’t end up paying any more than the principal amount for those purchases.

If you go with a secured card, it should be used primarily for building credit. It is not the kind of card that’s good for making a large purchase and paying it off over time, because you’ll have to come up with a security deposit just to be issued the card, and the interest fees are typically pretty high.

An unsecured card can be good when your computer breaks down or you need car repairs. You will have to pay interest if you can’t repay the full amount at once, but it’ll be less than if you used a secured card and you’ll still be building your credit.

Best of luck to you on your credit-building journey!

Sources:

1. doughroller.net, A Rare Glimpse Inside the FICO Credit Score Formula
2. debt.com, Making sure you have enough time to repair your credit.
3. thebalance.com, What Is an Unsecured Credit Card and How Can You Get One?
4. nerdwallet.com, What Is a Secured Credit Card? How Is It Different From an Unsecured Card?
5. cardrates.com, Can You Use a Fingerhut® Credit Card Anywhere? (3 Options for Purchases)
6. discover.com, Apply for the best Discover credit card for you
7. discover.com, Get security alerts that go above and beyond your account
8. nerdwallet.com, Using a Credit Card to Build Your Credit