No Credit

How to Choose the Best Card for People with No Credit

Lacking a credit history and not sure what options you have? Luckily, a number of products on the market are aimed specifically at people with no credit. Most fall into one of two categories – prepaid debit cards or secured credit cards. Though these cards share a number of similarities, you’re likely to find that one is clearly a better choice for you than the other. Check out the tips below for more information to help you decide between the two.

Here are the factors you need to consider:

• Know your main, long-term goal: Consider why you’re looking to get the card. Are you trying to build a credit history, or do you just want something that’s more of a pure alternative to cash? Only credit cards will help you build credit, so stay away from prepaid debit cards if that is your goal. Prepaid debit cards are better for people looking to either limit their spending or easily access money in an account.

• Consider the cost: Most credit and debit cards available to people with no credit come with fees attached. These fees are usually annual or monthly charges just for the privilege of owning the card. In the case of debit cards, you could also have to pay every time you load money onto your card. Additionally, with a secured credit card, you’ll have to set aside some money in an account that you won’t be able to access while your card is active. The cost of these options – both upfront and ongoing – can really add up.

• Decide how much protection matters: Credit cards in general offer more protection against unauthorized charges, so you’ll face less risk if your credit card is stolen compared to a prepaid debit card. Some prepaid debit cards provide some protection, but many do not. If your prepaid card is stolen, you could end up losing the money you had loaded onto it.

Benefits: Secured Credit Cards / Prepaid Debit Cards

Prepaid debit cards and secured credit cards have a number of benefits, and you’ll need to decide which ones are most important for your situation. Here are a few:

• Convenience: One of the main benefits of any credit or debit card is the convenience factor it provides, especially as an alternative to carrying cash.

• Debt limitation: The chief benefit of both prepaid debit and secured credit cards is that they limit the amount of debt you’ll rack up. Prepaid debit cards don’t allow you to spend more than you have, so you can’t get into debt at all, and the credit limits on secured credit cards are low enough that you usually won’t pile up a mountain of debt.

• Credit history (secured credit card only): If you opt for a secured credit card, you’ll be able to build up a credit history. If you have a pattern of timely payments plus an ability to stay within your credit limit, it will be a positive one. This is especially important for young adults just starting out because a good credit history is necessary for making a lot of financial decisions later on, like buying a house or renting an apartment. A healthy credit history will also help you get approved for an unsecured credit card, most of which come with higher credit limits, lower fees, and other perks like cash back and rewards.

What to Watch Out For

• Funding requirements: Secured credit cards require a deposit that you can’t touch, as collateral for your account, and prepaid debit cards require you to load money onto them ahead of time. This means that with both these options, you’ll need to set aside money in order to use them.

• Low limits: You probably won’t be able to spend more than a few hundred dollars at a time with either option. Secured credit cards usually have credit limits in the $300 to $500 range. If you need to make a larger purchase, you’ll probably have to write a check or withdraw cash.

• Fees: If you have good credit, it’s not too difficult to find unsecured credit cards that have no annual fees, so both secured credit and prepaid debit cards are very expensive by comparison. The annual fees for secured credit cards are usually upwards of $30 per year, and some prepaid debit cards charge as much as $10 per month in addition to charging for activation and reloading.

Even though your options are limited, you still need to do research. Whichever card you choose could set you up for a stronger financial future, if you use it correctly.