When it comes to qualifying for a credit card, first-timers and borrowers with bad credit are in the same boat. Whether you’ve never opened a line of credit before or have a long history of missed and late payments, the steps to take are pretty much the same.
It’s all about starting small and building your credit patiently. If you’re consistently responsible, your score will rise over time. It’s like losing weight - as long as you’re consistent with healthy food choices and activity levels, the changes you’re looking for will happen.
But before you can start building your credit, you need to actually qualify for a card. Here’s what you can do right now.
Check Your Credit
Before signing up for a credit card, you should view your credit report for free at AnnualCreditReport.com. A credit report doesn’t reveal every piece of relevant financial information, like how much you save for retirement or the current state of your emergency fund, but it does include all your current and past loans. It’s a way for lenders to determine how financially responsible you are before approving you for credit.
There are three major credit bureaus that track credit activity, each with their own credit report: Experian, TransUnion and Equifax. You can view one, two or all three credit reports, but they should all look fairly similar.
The credit report won’t show your credit score
, which can actually vary depending on what kind of model the lender is using. The credit score is a number that takes all your credit information into account and provides a comprehensive figure, like a grade on a report card.
The FICO credit score model, commonly used by most lenders, ranges from 300 to 850 points. The scores are divided as follows:
- 800 and up: excellent
- 740 to 799: very good
- 670 to 739: good
- 580 to 669: fair
- 579 and less: poor
The strength of your credit history directly impacts how likely you are to be approved, as well as what kind of card you’ll qualify for. Only people with excellent or very good credit will be eligible for the best travel and reward credit cards.
If you’ve never taken out any form of credit, chances are you have no history to check. Thankfully, you can start building your credit with a secured card.
Sign up for a Secured Card
If you don’t have a credit history or have poor credit, try applying for a secured credit card. A secured card has a mandatory deposit equal to the credit limit, usually a few hundred dollars. It’s a great way for lenders to offer credit options to risky borrowers who would otherwise never qualify.
Customers with no credit or bad credit apply for a secured credit card, put down the deposit and receive a card in the mail. The card acts like any other credit card, except it usually has a low credit limit and higher-than-average APR.
Secured cards report activity to the three major credit bureaus, so cardholders who use the card responsibly will see their credit score increase after just a few months. Many cards even provide free access to credit scores, so users can watch their score improve over time. Some even automatically upgrade secured cards to regular credit cards after a certain duration of consistent use.
Not every secured card has the same features. For example, customers with the Discover it Secured Card earn cash back on gas station and restaurant purchases. The Secured Mastercard from Capital One lets users deposit less than the credit limit if they’re deemed eligible. Before signing up, shop around for a secured card without an annual fee or activation fee.
Respond to Pre-Approved Mailers
Chances are you get junk mail every day, from donation requests to Bed Bath & Beyond coupons. Within that pile of mail is probably a pre-approved credit card offer. If you're trying to apply for a credit card, you can start with one of those letters.
These offers are usually run by marketing companies and not the credit card providers, so you may still be denied even if you're pre-approved. However, it’s still worth a shot for anyone struggling to qualify for a traditional card.
What to Look for in a Credit Card
Applying for your first credit card can be exciting, but choosing the wrong card for your specific situation will damper that enthusiasm quickly. Before applying for a card, look up its interest rate or APR. This shows how much interest you'll owe if you don't pay off your balance in full by the due date. For that reason, APR only really matters if you're planning on carrying a balance with the card.
Try to find a card without an annual fee. Those are typically only worthwhile if there’s a sign-up bonus or a decent cash-back program. Then, look at the card’s rewards programs. Someone who eats out frequently benefits more from a card with 3% cash back on restaurants than a card with 3% cash back on groceries.
What to Do When You’ve Got a Credit Card
Once you have a credit card, it’s important to develop good habits. Here are some best practices on how to use it:
Pay Your Bill on Time
Paying your credit card bills on time makes up 35% of your credit score
. You don’t have to pay off your balance in full as long as you make the minimum payment by your due date.
If it's easier for you, set up auto-pay to automatically deduct the minimum payment or full balance from your bank account every month. You can also use calendar reminders or sign up for paperless billing which will send email notifications to your account.
Keep Utilization Below 30%
Credit utilization makes up 30% of your credit score
. Using more than 30% of your credit limit will cause a negative drop because it makes lenders think you're relying too heavily on credit to fund your lifestyle. Multiply your current credit limit by 30% to figure out your personal benchmark.