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If you don’t have much of a credit history, or you don’t have any credit at all, there’s no "easy" button to push to qualify for the best credit cards. But it also doesn’t have to be as hard as you may think.
Around 1 in 8 Americans (13%) say they don’t have any credit history, according to a NerdWallet survey. Many of them have tried to build a history but aren’t making progress or aren't sure where to start.
Here are three steps to get on track to good credit and great credit cards. These steps won’t necessarily work for everyone, especially those with damaged credit. But it's a path worth taking for those with little to no credit history.
1. Get a credit-builder loan
Though they’re not widely advertised, credit-builder loans are a simple tool to demonstrate good credit habits and start beefing up your credit profile.
With a traditional loan, the lender gives you money upfront, and you pay it back in installments. A credit-builder loan works in reverse: You pay the lender monthly installments, then you get the money back at the end. You're essentially lending yourself money, and because the payments are reported to the credit bureaus, it builds your credit.
Even if you’ve been turned down for a personal loan in the past, you have a good shot at a credit-builder loan. The lender isn't putting its own money at risk, and it holds your money in a savings account until the loan is fully paid. When the lender is protected like that, it can make these loans available to people with thin credit or no credit.
The key is to make all of your payments on time. Do that, and your credit reports will get an influx of positive data. Make just one late payment, though, and it will also show up on your credit report. That can undo a lot of the positive momentum built by on-time payments. That’s because your payment history accounts for 35% of your credit score.
As with a traditional loan, you’ll pay some fees to take advantage of a credit-builder loan. Look for a local credit union or online lender to find a credit-builder loan that you can make work with your monthly budget. Loan terms usually last at least six months but can stretch out as long as 24 months.
2. Open a secured credit card
Once you’ve made all the payments on your credit-builder loan, you’ll get a nice sum of cash back from the lender. It’s all the money you’ve paid, plus a little interest to boot.
Instead of spending that small windfall, take it and use it as a deposit on a secured credit card.
These cards work like a regular credit card, with one key difference. Secured credit cards require a cash security deposit, which is usually equal to your credit limit. The deposit protects the lender, so it’s able to extend credit to those with little to no history.
Use your new secured credit card to make regular, small purchases, then pay them off right away. Your activity on the card will get reported to the credit bureaus. Pay your bill on time every month and keep your balance low, and your credit should benefit.
Financial educator and author Shanté Nicole Harris went this route. After enduring a medical crisis, divorce and unemployment, Harris was desperate to take control of her finances and build her credit. “I started with a secured credit card with only a $300 limit and a $29 annual fee," she said. "After one year of using the card responsibly, I was upgraded to an unsecured credit card.”
“Start with a secured card, even though it has an annual fee, to make yourself a path towards the unsecured cards you want with no fees.”Shanté Nicole Harris, financial educator and author
Over time, Harris built a FICO credit score in the mid-700s, thanks in part to using a secured credit card. She went on to become a credit counselor to help others improve their financial health. Harris now runs a business called Financial Common Cents, and often gives this advice to those she works with: “Start with a secured card, even though it has an annual fee, to make yourself a path towards the unsecured cards you want with no fees.”
3. Apply for a good card when your credit improves
Check your credit score periodically to see how you're doing. Many websites allow you to see your score for free, so it’s OK to check as often as you want. (But no need to go overboard; once a month is plenty.)
Once your score improves, you’re ready to graduate to a traditional unsecured credit card and get your deposit back. The issuer of your secured card may have unsecured cards you can upgrade to. If not, look elsewhere. The better your score, the better the cards you’ll qualify for. The top credit cards typically require good to excellent credit — generally defined as a score of 690 or above — but credit scores alone do not guarantee approval.
Many major credit card issuers offer online pre-qualification. This gives you an idea of whether you're likely to be approved for a card before you actually apply. Pre-qualification does not guarantee final approval, but it's a good sign.
When you do get approved for that credit card you want, try to treat it like a debit card: Use it for the spending you were going to do anyway — rather than splurging because now you can roll debt from one month to the next — and pay your bill in full and on time each month. Continue to monitor your credit report regularly, and your credit will continue riding high on all that hard work you did.
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