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Using credit cards to build to get credit is a smart strategy, as long as you manage your spending and making your monthly payment.
Utilizing a credit card to purchase an item and then paying off the balance each month represents a great way to showcase your financial responsibility to lenders. With your spending and payment under control, the bigger question becomes: What are the best credit cards to build credit?
Use credit cards to build credit
Obtaining a credit card when establishing a credit history allows you to show a good track record of borrowing. The way this works is that you buy items on the credit card and then pay the credit card balance off each month.
When you obtain a credit card, that new card increases your available credit, which looks good on your credit report and increases your overall credit score if you use it wisely.
Sometimes you might find it difficult to obtain a credit card initially. Luckily, options exist — such as a secured card from your bank — that allow you to obtain a credit card, even without credit.
Best credit cards to help you build credit
While you might not qualify for a top-tier credit card, such as from one of the major credit card companies, you do have some options available. While not optimal with lower credit limits and higher interest rates and annual fees, the credit cards available can help you build your credit so you can qualify for a lower-interest, higher-balance card later.
CARD SEARCH: Start building your credit today. Compare the best credit card offers at Bankrate.com.
Credit-builder credit card
Not to be confused with a debit card, this type of prepaid card reports your account activity to the major credit bureaus.
A monthly fee is automatically deducted from your account, and the financial institution reports this fee as an interest payment. This, in turn, helps to raise your credit score over time.
Make sure to read the fine print, as some of these cards require an initial fee and the fee structure can vary between cards.
High-interest, unsecured credit card
While not requiring you to secure them with a deposit, a high-interest, unsecured credit card does levy the high rate. Also expect to pay an annual fee as well as other upfront fees with this type of card.
In addition to requiring no money down to open, some of these cards do not run a credit check as part of the application process, making them a great alternative for someone with bad or no credit.
Secured credit card
A secured credit card requires you to deposit a certain amount on the card as collateral to guard against default. The best part about a secured credit card is the ability to change it into an unsecured card after a certain amount of time. Many banks offer this card type as a way for members to build their credit.
Also, keep in mind that this type of card carries an annual fee and other types of fees. In addition, the amount deposited as collateral usually dictates the charging capability on the card.
Store credit card
You also can get a store credit card, usually in the form of a gas card or card specific to the store. You only can use most of these types of cards at the issuing store, though if the card carries a Visa or MasterCard logo, you can use it elsewhere.
While easy to qualify for, store credit cards carry a high interest rate and low credit limits, further limiting their appeal.
Using all of the options available to you when building credit should have your credit score up in no time. Just make sure to not let any balances linger on any card you use to build credit.
Used properly, a credit card is a great way to build credit and can get you on the road to financial success.