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Why You Beed a Credit Card to Build Credit
Building credit in the USA is important for several reasons. An excellent credit score can help you secure loans for important purchases, such as a home or a car, and can even impact your ability to get a job.
One way to establish credit is by using a credit card. A secured credit card requires a deposit to be made upfront as collateral. This deposit acts as your credit limit and is refundable if you close the account in good standing. By using a secured credit card responsibly, you demonstrate your ability to manage credit, which can lead to an increase in your credit scores and eventually qualify you for an unsecured card.
An unsecured credit card is a traditional credit card that does not require a deposit. Instead, the credit card issuer will extend you a credit line based on your credit history and credit score. Using an unsecured card responsibly and paying your bills on time can help you establish a positive payment history and increase your credit score.
When using a credit card, it's crucial to not exceed your credit limit and to make payments on time. Late payments may impact your credit score negatively and damage your credit history.
Types of Credit Cards to Build Credit
There are two major types of credit cards that can help build credit in the USA: secured and unsecured cards.
Secured Card
A secured credit card requires you to contribute a security deposit to be made upfront, which acts as collateral for the credit card issuer. The deposit is refundable and is typically equal to the credit limit on the card. If you use your secured credit card responsibly and make timely payments, you can establish a positive payment history and demonstrate your ability to manage credit. This can lead to an increase in your credit line and eventually qualify you for an unsecured card.
Unsecured card
An unsecured credit card has an unsecured line of credit. It does not require a security deposit. Instead, the credit card issuer will extend you a credit line based on your credit history and credit score. Using an unsecured card responsibly and paying your bills on time can help you establish a payment history and improve your credit score.
Unsecured credit cards may have additional bonuses like points for annual streaming service purchases, grocery stores and other eligible purchases, cash rewards, and travel miles.
Not all secured cards are equal when it comes to building credit. Some secured cards may not report your payment history to the credit bureaus, which means that using them responsibly may not actually help improve your credit score. When choosing a secured card, it's important to look for one that reports to the credit bureaus and offers the opportunity to increase your credit limit as you demonstrate responsible credit management.
Pros and Cons of Credit Build Credit Cards
Pros
- Establishing a credit history. One of the main advantages of using credit cards to build credit is that they can help establish a credit history. A credit history is a record of how you have managed credit in the past and is used to determine your creditworthiness. By using a credit card responsibly and making timely payments, you can demonstrate your ability to manage credit, which can be beneficial when applying for loans in the future.
- Improving credit score. Another advantage of using credit cards to build credit is that they can help improve your credit score. Your credit score is a representation of your creditworthiness and is used by lenders to decide on the terms and interest rates of loans you are eligible for. By using a credit card responsibly and making timely payments, you can demonstrate your ability to manage credit, which can lead to an improvement in your credit score.
- Convenient access to credit. Credit cards also offer convenient access to credit, which can be beneficial in case of an emergency or for making large purchases. With a credit card, you can make purchases without having to carry cash and can also take advantage of rewards programs and other benefits offered by credit card issuers.
- Building a positive payment history. Using a credit card can help build a positive payment history. It is an important factor in determining your credit score. By making timely payments, you can demonstrate your ability to manage debt, which can be beneficial when applying for loans in the future. Some cards have a dollar-for-dollar match, allowing you to receive bonuses.
Cons
- High interest rates. Credit cards often have high interest rates. If you pay off a balance on your card from month to month, the interest charges can add up and make it more difficult to pay off your debt. This can also make it more challenging to build credit if you're not able to pay your bills in full each month.
- Fees. Another disadvantage of credit cards is that they often come with various fees, such as annual fees, late fees, foreign transaction fee, cash advance fee, balance transfer fees, and other annual or hidden fees. These fees can add up quickly and make it more difficult to manage your debt.
- The temptation to spend. Credit cards can also be a temptation to spend more than you can afford, which can lead to high levels of debt. This can be dangerous for people who are trying to build credit, as high levels of debt can negatively impact your credit score.
- Risk of identity theft. Finally, using a credit card also carries the risk of identity theft. If your credit card information is stolen, it can be used to make unauthorized purchases, which can result in high levels of debt and damage to your credit score.
The Best Credit Cards to Build Credit
The best credit cards to build credit in the USA are:
Discover It Secured Card
Capital One Secured Mastercard
OpenSky Secured Visa Credit Card
Indigo Platinum Mastercard
Capital One Platinum Secured Credit Card
How to Get Credit Cards to Build Credit
Getting a credit card to build credit in the USA is a step-by-step process that involves the following steps:
- Check your credit score. To apply for any credit card, you must know your credit score. You can obtain a free credit score from several sources, including credit bureaus, credit monitoring services, and some credit card issuers. Knowing your credit score can help you determine the type of credit card you may be eligible for and what to expect from lenders.
- Determine your credit card needs. Once you know your credit score, it's time to determine what type of credit card is best for you. If you have a limited or non-established credit history, a secured credit card may be a good option. If you have a bad credit history, an unsecured credit card for bad credit applicants may be the best choice.
- Shop around. After you know what type of credit card you need, it's time to shop around and compare different options. Consider factors like interest rates, fees, credit limits, rewards programs, and customer service when making your choice. You can use online resources to compare credit cards and find the best option for your needs.
- Apply for a credit card. Once you have selected a credit card, it's time to apply. You can apply online, over the phone, or in person. The application process typically requires you to provide personal information, such as your name, address, bank account, and employment information. You may be asked to provide proof of income and a government-issued ID.
- Use your credit card responsibly. Once you have received your credit card and established a credit line, it's important to use it responsibly. Make timely payments, keep your balance low, and avoid overspending. Using your credit card responsibly and making timely payments will help you build your credit and improve your credit score over time.
How to Build Credit With Credit Cards
Building credit with credit cards in the USA requires a combination of responsible credit card use and a good understanding of credit reporting and scoring. Here are the steps to build credit with credit cards:
- Get a credit card. To build credit, you need to have a credit card. You can either get a secured credit card or an unsecured credit card. A secured credit card has a security deposit requirement, which is typically equal to your credit limit. An unsecured credit card does not require a security deposit but is more difficult to get if you have a limited credit history.
- Use your credit card regularly. To build credit, you need to use your credit card regularly. Make small purchases with your card, and pay off the balance in full each month. This will help establish a consistent payment history, which is an important factor in your credit score.
- Make timely payments. Making timely payments is critical to building good credit. Late payments can impact your credit score negatively and harm your credit standing. Set up automatic payments or reminders to ensure that you make your payments on time each month.
- Keep your credit utilization low. Your credit utilization, or the amount of credit you use compared to your credit limit, is another important factor in your credit score. To build credit, it is recommended to keep your credit utilization below 30% of your credit limit. This means that if your credit limit is $1,000, you should not use more than $300 of that credit limit each month.
- Consider using multiple credit cards. To build a strong credit history, consider using multiple credit cards. You can have a mix of secured and unsecured credit cards, and using multiple cards can help demonstrate that you are capable of managing different types of credit.
Building credit with credit cards requires time and effort, but it is well worth the investment. Good credit can open doors to more opportunities, including better rates on loans and other financial products. By following these steps, you can build a solid credit history and achieve your financial goals.
How to Build Credit Without Credit Cards
Building credit without credit cards in the USA can be challenging, but it is possible. Here are steps to build credit without a credit card:
- Get a loan. One way to build credit is by getting a loan. You can get personal loans, auto loan, or secured loans. Repaying a loan on time will help establish a positive payment history. It is an important factor in your credit score.
- Use a secured credit card. If you can't get an unsecured credit card, consider getting a secured credit card. A secured credit card requires a security deposit, which is typically equal to your credit limit. Using a secured credit card responsibly helps you build credit over time.
- Become an authorized user. Another option is to become an authorized user on someone else's credit card account. You will not be responsible for repaying the debt, but your credit will be affected by the activity on the account.
- Rent a place to live. Renting a place to live and making timely rent payments can also help build credit. Some landlords report rent payments to credit bureaus, which can help establish a positive payment history.
- Pay bills on time. Making timely payments on other bills, such as utility bills, cell phone bills, and cable bills can also help build credit. Many companies report timely bill payments to credit bureaus, which can help establish a positive payment history.
- Monitor your credit. To stay on top of your credit-building progress, monitor your credit regularly. You are entitled to a free credit report from each of the three major credit bureaus once a year. Review your credit reports for accuracy and dispute any errors that may appear.
