A Guide To Credit Building Credit Cards
Credit cards are handy to have for a variety of reasons. Not only do these cards provide quick and easy access to funds when making purchases, but they are also a great way to build your credit. Using a credit card helps to establish a history of using and paying off credit in a regular and responsible fashion. Without access to a credit card or some other type of credit, it can be quite difficult to establish a credit history.
However, getting started with credit can sometimes pose a challenge. If you have never obtained a credit card before, you likely do not have a credit history that would qualify you for one. It may seem strange, but lenders are often hesitant to approve credit cards for people who have never had any previous debt, even if a person does not have anything detrimental on his or her credit history.
Of course, sometimes detrimental entries on a person’s credit history is the problem. Perhaps you have had credit problems in the past, and as such, you do not currently have a high enough credit score to get a mainstream credit card. Detrimental entries on a person’s credit history may include one or more debts not repaid, late payments, or using too much credit in a less than responsible fashion. Even if you are currently managing your money responsibly, past credit issues can stay on your record for years, and prevent you from being able to qualify for a standard credit card. As such, it can often be difficult to rebuild your credit, since lenders are unwilling to extend new credit to you.
Fortunately, there are ways to initially establish a history of credit, or rebuild your credit. Paying your bills on time and making sure to manage your money responsibly can help build your credit over time. However, if you want to speed the process up a bit, a credit building credit card can help.
What are Credit Building Credit Cards?
Basically, a credit building credit card is a card that is specifically designed for individuals who may not be able to qualify for other types of credit. Although you might wish to qualify for a card with the best interest rates, low fees, and a generous rewards program, you may not qualify for the best credit deals. Credit building credit cards, although not the best deal for people with excellent credit, are a good opportunity for individuals with no credit history, or a bad credit history.
Lenders who issue these cards are naturally taking a bigger risk than they would be when lending money to a person with good credit. As such, these cards generally have low credit limits, and a higher rate of interest.
Although at first glance a low credit limit and higher rate of interest may seem like “downsides” to these cards, they really are not. In fact, when used properly, a lower credit limit can be helpful as you learn to manage money responsibly. When a card’s credit limit is low, there is less of a chance to spend too much and accumulate more debt than you can comfortably handle. Instead, you should focus on using one of these cards on a regular basis each month, for only essential purchases. When the credit bill comes due, you should always pay the balance in full. By doing so, you will help to build a positive credit history for yourself.
The higher rate of interest on these cards will not be a negative unless you use the card for more than you are able to pay off in full when the bill is due. When used responsibly, with the intention of paying the balance in full each month, you will not be negatively affected by a higher rate of interest.
Using a Secured Credit Card
A secured credit card is another type of card that can be used to build up one’s credit score. These cards are good for people who do not have good enough credit to get other types of cards. A deposit is paid in advance when using these cards. This deposit serves as collateral against any purchases made with the card on credit. The credit limit on these cards may be equal to the amount of the security deposit, or it might be higher, depending on your credit rating. Using one of these cards responsibly can help build up your credit score.
When Should I Apply for a Credit Building Credit Card?
If you have never had a credit card previously, applying for one of these cards first is generally the best approach. If you do not have a previous credit history, you are likely to be turned down if you were to apply for a standard credit card. Applying for and then being turned down for a credit card is detrimental to your credit score. Instead, by applying for and then using a credit building card responsibly for a year or so, you will then be able to apply for and obtain a more competitive credit deal.
The same is true if you know you currently have a low credit score because of credit problems in your past. Applying for a regular credit card would simply hurt your credit history, because you would accumulate another credit check and denial on your record. By applying for a credit building card instead, you will likely be accepted, and will be able to use the card to build your credit back up over time. After using one of these cards responsibly for a while, then you will be able to apply for a standard credit card, and have a better chance of being accepted.
Advantages of Using a Credit Card
Naturally, helping to build a solid and favorable credit history is one good reason to use credit cards. However, there are also other advantages to using a card instead of cash.
Many people find it easier to organize a budget when using a card, since the monthly bill provides a tally of all purchases made. Keeping track of purchases in this fashion can be far easier than trying to keep track of every individual receipt.
Credit cards also provide a level of security that cash simply does not have. If you were to lose cash while shopping, there is a good chance you will never be able to recover it. However, if you lose a credit card, it can simply be cancelled and reissued. Even if someone were to try to use it fraudulently, cards have protections in place.
Having access to credit, even the more limited amount of credit provided by credit building credit cards, is invaluable if you happen to have a financial emergency. For example, if your vehicle unexpectedly needs repairs or you encounter unexpected doctor bills, you might not have enough cash to cover the expenses. Having access to credit will allow you to pay the bills, and then pay the balance off when you have the cash to do so. This can be a financial lifesaver, even if it means you do need to carry a balance over until the next month, and pay some interest or fees. Without having access to credit, you might end up with a bill you cannot pay, which in turn could further damage your credit score.