Q: What are the best cards for building credit for 2015?
A: Are you new to credit or trying to rebuild your credit? Whatever the case may be, it’s important to realize this:
When it comes to building credit how you handle your credit card account is much more important than the specific card you carry.
So, before offering recommendations for bad credit credit cards as well as cards designed for those with little or no credit history, here are 5 key tips for managing your account in way that will improve your credit score over time:
Tip #1: Have More Than One Credit Account
Not too long ago, someone posted a question the forum – she had a credit history of 5 years but could still not get approved for a mid-tier credit card. It appears the reason was because she had only been using one card with a low limit during that entire time.
As a long range goal, you want to eventually build up to having several different credit accounts on your file – a few revolving accounts (credit cards) as well as at least one or two installment accounts (loans). This is because your FICO credit score takes into account the types of credit accounts you have as well as the total number. So, if you currently have no credit history you may want to try to get more than one credit card in your first year or so of starting and then try adding several more over time as your score steadily grows (assuming you handle them all responsibly).
Tip #2: Always Pay on Time
Few people realize that a full 35% of your FICO credit score is based on payment history! Credit building cards won’t be helpful if you don’t pay your bill on time. So do yourself a favor and do whatever is necessary to ensure you have that payment in on time each and every month.
To do this you may want to even consider setting up automatic payment using your checking account. But doing that can be risky if you don’t keep close tabs on your current balance (because one month you may have insufficient funds in your checking, so the payment won’t go through). Your credit card due date will be the same each month so it can be helpful to put a reminder in your calendar and even sign up for text reminders online from your issuer. There’s never an excuse to be late with a payment, so don’t be.
Tip #3: Avoid High Credit Utilization
This is one of the most important tips for how to build credit. It also happens to be one of the most common mistakes made!
While it can be convenient to use a credit card to pay for almost everything, not to mention rewarding if you have a cash back or miles credit card, it can cause you to use an excessive percentage of your credit line. Unfortunately, if you use too much of your credit limit, it actually backfires and hurts your FICO score! Why? Because this “credit utilization” is a factor in scoring. Using a high amount of credit = sub-optimal scores! Ideally you should aim to stay below 30% of your limit at all times (on any given card and in total across all your credit lines).
Tip #4: Don’t Carry a Balance
This is another frequent mistake made when using credit cards to build credit. It’s frightening just how many Americans believe that having a balance is better for credit scores.
You do NOT need to keep a balance to build your credit. Now if you do carry a balance (using a small amount of your credit limit) I’m not claiming that will be bad for your credit score, but it’s simply not necessary. Here’s why…
Each month when your cycle closes, the total amount owed is what gets reported – that’s current charges + any balances you are carrying. So carrying a debt will indeed show account activity each month, but simply using your credit card each month for purchases will accomplish the same thing, too. So why keep a balance? Just use your account each month and pay off the purchases in full.
Tip #5: Keep Tabs on Your Credit Report
Don’t forget to regularly keep tabs on your credit report. This is important because even if it looks like it should right now, you never know in the future when something incorrect might appear, either by accident or due to identity theft. Now I’m not saying you have to go pay for one of those monthly credit monitoring services, but you should at least take advantage of the free credit report all Americans are entitled to once per year. Bear in mind this won’t provide your credit score but will show everything in your credit file. You can get a free report each year from each of the three credit bureaus at AnnualCreditReport.com.
Whew… now that we have all that info out of the way, let’s discuss my recommendations…
Credit Building For Bad Credit?
Rebuilding credit is a bit more difficult than building credit for scratch. This is especially true nowadays, after the banks got burned so badly during the Great Recession. Even though the economy has improved since then getting approved for an unsecured credit card can still be challenging. This is why a secured card can be a good alternative – many have guaranteed approval (if you meet their basic residency, age requirements and can put some funds on deposit to secure the credit line) and they look the same on your credit report as an unsecured card would.
Credit Building For Limited or No Credit History?
For college students the easiest ones to get approved for will be student cards. They are typically very accommodating to those with no credit history.
For all others it will be a little bit trickier to get approved. Often times I see adults that are 25, 30, or older and have never had a credit card. Much to their surprise, when the apply for a basic credit building card they get denied due to insufficient history.
Each person’s circumstance is different, but if you have zero history than I would recommend a good secured card like this. It’s actually better to have no credit history than a bad credit history but it can still be a feeling of alienation when you have no track record. Secured cards can be a great way to build up a solid track record, and since you have skin in the game in the form of a credit deposit the issuer doesn’t really have any risk. That’s why they’re so willing to give people with no a credit history a shot at proving themselves.
If you already have a little credit history (such as a loan) then I would recommend cards for fair credit.
Written or last updated July 16, 2015