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    Credit Cards for People with Little or No Credit History

    February 10, 2010

    Dear Carrie,

    What's the best credit card for people with no credit history? 

    —A Reader 

    Dear Reader,

    Ah, one of the "Catch-22s" of personal finance: To get a good credit card, with reasonable terms and a reasonable amount of credit, you need a good credit score. But to get a good credit score, you need to have credit. How do you open the door so you can build a credit history?

    The reality is that there is no "best credit card" for people with no credit history. And in fact you will likely have to settle for a card with less than ideal terms. So your first order of business is to focus on building a good credit history. Fortunately, there are a lot of ways to do that:

    • Get a store card or a gas card: Department stores and other national retailers, including gas companies, are generally eager to provide credit cards to customers. Typically, the terms are not particular good; many of them charge high interest rates (some more than 20 percent). But those terms don't really matter if you are diligent about paying off your balance in full each month. After all, your goal is to build a credit history without overspending.
    • Try a secured card: Most card issuers will give anyone a "secured" card with a line of credit backed by a cash deposit. You give the issuer, say, $500; they give you a card with a credit line of $500. Their risk is zero, but having the card gives you a chance to use it; by paying off your bill promptly each month (and in full), you'll lay the foundation for a good credit score.
    • Borrow from your bank: You can also build a credit score by taking out a loan from your bank and using a savings account as collateral. Then you pay back the loan, making sure your payments are never late, which gives you some credibility with the credit reporting agencies. (You may be asked for a co-signer—a parent, say—and if that's what it takes and you can find a co-signer, it might be worth it. But don't use a co-signer if you have any doubt about your ability to repay, since the co-signer bears the financial responsibility. If you don't pay the money back, his or her credit score will be affected.)

    Recent changes to the laws governing credit cards actually make it more difficult for young people to get credit cards. If you're under 21, new federal law (effective February 22) requires proof of ability to repay as a condition for receiving a credit card or mandates that you have a co-signer who is over 21 with the means to repay. Again, a parent might be willing to do this for a child. By repaying on time and in full, the card holder can build a positive credit history.

    As your credit score improves (and you can keep track by using a site like AnnualCreditReport.com), you should be eligible for a card with a lower interest rate and a higher credit limit. There are also all kinds of perks and rewards offered by all kinds of issuers, from airlines miles to cash rebates, but those add-ons are typically dwarfed by interest charges. You may need to carry a balance at some point in your life; that's not uncommon, but when you do, you'll want the best rate you can get. A high credit score, which you'll build over time, will help you greatly. And when it comes time for serious amounts of credit, such as a home mortgage, the score will be even more important.

    I should point out here that while credit cards are an essential tool for personal finance, they should not be viewed as a way to live beyond your means. Use them when it's necessary (buying online, renting a car, paying for large purchases), but carrying a balance and paying interest is an expensive way to finance your lifestyle. (Note, too, that late fees can be astronomical—and paying late will negatively impact your credit rating. Also look out for high membership fees.) You definitely want a card with a low rate for those times in your life when you do run a balance, but your goal should be to avoid expensive and unnecessary debt.

    The bottom line: It takes credit to get good credit. So find an opportunity to get credit and use it wisely. The rewards—lower borrowing costs, easier access to additional funds, and sometimes even landing a job or an apartment—can be substantial, and they can last a lifetime.

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