How to Choose Your First Credit Card to Build Credit

For most people with no credit history, the first card is either a secured card (backed by a deposit you make) or an unsecured card with no annual fee, and the choice depends on what an issuer will approve you for. A credit-builder loan or authorized-user status can start a file without a card at all. Whichever route you choose, a first card builds credit only if the issuer reports it to the credit bureaus and you pay on time.

Key takeaways

• Start with the cheapest option you can be approved for: no annual fee first, then a secured card, with a credit-builder loan or authorized-user status as non-card routes.
• Applicants under 21 need an independent ability to make the minimum payments or a cosigner aged 21 or older (Regulation Z, 12 CFR 1026.51(b)).
• In the first year after the account can first be used, required fees cannot exceed 25 percent of the credit limit, so a $300 limit means at most $75; late fees and optional fees fall outside that cap, and from year two the full fee schedule applies.
• The CFPB lists on-time payment history as the top factor in most scores and says many experts suggest using under 30 percent of your limit; you do not need to carry a balance.

Five routes compared

The routes differ mainly in what the issuer needs from you and where your money sits.

Prepaid and debit cards are not on the list because they do not build a credit history, per the CFPB's guidance on starting or rebuilding credit.

Secured, student or no-fee card

When a secured card makes sense

A secured card is the usual answer when an unsecured application is likely to be declined. The CFPB describes the mechanics: you deposit an amount such as $500 and can spend up to it, and paying the bill restores the available amount. What matters for the choice is the exit: whether the deposit is refunded when you close the account in good standing, and whether the issuer reviews the account for a switch to an unsecured card after a period of on-time payments. Get both answers from the card agreement, not a marketing page.

Where student cards fit

Regulation Z (12 CFR 1026.57) treats any credit card issued to a full- or part-time college student as a "college student credit card", but its rules govern marketing, not pricing: an issuer may not offer a student a tangible item to apply on or near campus or at a school-related event, and schools must publicly disclose their card-marketing agreements. Approval follows the issuer's own standards, plus the under-21 rule in the next section for younger students. The practical test is the same as for any card: annual fee, APR and reporting.

Why start with no annual fee

A first card exists to create a record, and an annual fee is a cost you pay before you have gained anything. If you have a choice, take the one with no annual or monthly fee. Fees appear in the rates-and-fees table the issuer must disclose with the application, so read that table rather than a ranking.

The under-21 rule

Under the CARD Act's ability-to-pay rule, as written in Regulation Z, 12 CFR 1026.51(b), an issuer may open a card for a consumer under 21 only if it receives a written application and either of two things is true.

• Independent ability to pay. The issuer has financial information showing the applicant can make the minimum payments. Only the applicant's own current or reasonably expected income or assets count. Another person's income counts only if it is deposited regularly into an account the applicant holds, or if a statute or regulation gives the applicant an ownership interest in it.
• A cosigner, guarantor or joint applicant aged 21 or older. That person signs to be secondarily liable for the debts, or jointly liable on the account, and the issuer needs financial information showing they can make the payments.

Age is measured on the application date, and limit increases before 21 have their own conditions (see the FAQ below). The rule does not apply to someone added as an authorized user with no liability for the account's debts. The CFPB's page on age and credit card approval gives the same summary in plain language.

What to check before you apply

Annual fee, other fees and the first-year cap

Under 12 CFR 1026.52(a), the fees a consumer is required to pay during the first year after the account opens must not exceed 25 percent of the credit limit in effect when it opened. The cap covers fees for issuing the card or making credit available (including activity or inactivity fees), required insurance, fees for using the account such as cash advance, balance transfer and foreign transaction fees, and fixed finance charges. It does not cover periodic interest, late payment fees, over-the-limit fees, returned-payment fees or fees the consumer is not required to pay. A security deposit charged to the account counts as a fee under the rule, according to the commentary; a deposit funded separately and not charged to the account does not.

The cap applies only during the first year after the account can first be used for transactions; from year two, the card's full fee schedule applies. It matters most on small limits, which is where many first cards sit.

cap = 25% x credit limit
required fees = annual fee + (monthly fee x 12)

• cap is the most the issuer may require you to pay in fees during the first year.
• required fees are the fees the card's terms say you must pay, excluding interest, late fees and optional charges.

Illustrative example. A card has a $300 limit, a $49 annual fee and a $4 monthly fee. The cap is 25% x $300 = $75. The terms call for $49 + ($4 x 12) = $97 in required fees. That is $22 over the cap, and under the commentary any fee charged above it must be waived or credited back by the end of the next billing cycle. A card with the same limit and a $39 annual fee plus $3 a month totals $39 + $36 = $75, exactly at the cap. Either way, a quarter of the starting line goes to fees in year one, and a $39 annual fee charged to the card uses 39 / 300 = 13 percent of the line before you buy anything. That is the reason to compare fee schedules and prefer $0.

Reporting to the credit bureaus

A card helps only if its payment history reaches the credit files lenders use. Ask the issuer which of the three nationwide consumer reporting companies (Equifax, Experian and TransUnion) it reports to, then confirm it on your own reports (see the FAQ below).

APR

The APR matters only if you carry a balance, and a first-card strategy is to avoid doing that. A fixed APR does not change with an index, while a variable APR moves with one, so check which the card has. A fixed rate can still change, but the issuer generally has to notify you first, according to the CFPB. Treat the APR as a safety net, and prefer the lower one when other terms are equal.

How a card builds your score

The CFPB lists the factors scoring models typically consider: bill-paying history, current unpaid debt, the number and type of accounts, how long accounts have been open, credit utilization, new applications, and any collections, foreclosure or bankruptcy and how long ago it happened. Its page on getting and keeping a good score says repayment history is the top factor in most scores, many experts recommend using less than 30 percent of your total limit, and the highest scores often go with under 10 percent.

Utilization is the balance divided by the limit, and small limits make it move fast. Illustrative example on a $500 limit: a $150 balance when the statement posts is 150 / 500 = 30 percent, and $50 is 50 / 500 = 10 percent. Reporting dates vary by issuer, so ask which balance and date it reports; if it reports the statement balance, paying part of it before the statement closes lowers the reported figure without carrying interest.

The speed of a score rising depends on your starting file and cannot be promised. The one outcome the CFPB research on credit-builder loans supports is narrow: a 2020 study of 1,531 credit union members found that opening one raised the likelihood of having a credit score by 24 percent for people without an existing loan, while it appeared to lower scores for people who already had debt.

A simple way to decide

1. If you are under 21 without independent income, plan on a cosigner or joint applicant aged 21 or older if the issuer accepts one, or start with authorized-user status or a credit-builder loan.
2. If you can be approved for an unsecured card with no annual fee, apply for that one.
3. If you are declined or have a very thin file, move to a secured card with a refundable deposit.
4. Compare five terms: annual and monthly fees, bureaus reported to, deposit refund and upgrade path, APR, and the credit limit offered.

Applying for many cards in a short period can look like financial trouble to lenders, according to the CFPB's score guidance, so apply for one at a time.

Frequently asked questions

Do I need to carry a balance to build credit?

No. The CFPB says you do not need to carry a balance or have any debt to get a good score, and that paying the full balance each month gets the best scores and keeps interest costs low.

Do prepaid or debit cards help build credit?

No. The CFPB says prepaid cards cannot establish a credit history, and debit card and cash use do not show that you can repay borrowed money. A credit card, credit-builder loan or other reported account is needed to build a record.

Can the issuer raise my limit before I turn 21?

Only under the conditions in Regulation Z. If the account was opened on your own income or assets, a limit increase before 21 needs either your independent ability to pay the higher limit or a written agreement from a cosigner, guarantor or joint holder aged 21 or older. If the account was opened with a cosigner, that person must agree in writing to the increase, unless a joint holder aged 21 or older requests it.

Does being an authorized user build my credit?

It can, but only if the issuer reports the account on your file, which you should confirm. The CFPB's list of credit report errors includes being reported as the account owner when you are only an authorized user, so check how the account appears.

How can I tell whether a card is reporting?

View your reports from Equifax, Experian and TransUnion at AnnualCreditReport.com, where the CFPB says you can see them free once a week. If the new account is missing from one, ask the issuer which companies it reports to.

Checklist before you apply

• If you are under 21, confirm you can qualify on your own income or assets, or that the issuer accepts a cosigner aged 21 or older.
• Read the issuer's rate-and-fee table for annual fees, monthly fees and the APR; add up the required first-year fees and compare them with 25 percent of the limit.
• Ask which bureaus receive the account, and for a secured card, how the deposit is refunded.
• After approval, set up autopay for at least the minimum and aim to keep the reported balance well below the limit.
• Check your reports in two or three months to confirm the account is listed correctly.

This article is general education, not personal financial advice; terms and approval criteria vary by issuer.

Sources

• 12 CFR 1026.51, Ability to pay (CFPB)
• 12 CFR 1026.52, Limitations on fees (CFPB)
• 12 CFR 1026.57, College student credit card rules (CFPB)
• Can a card issuer consider my age? (CFPB)
• Ways to start or rebuild a good credit history (CFPB)
• What is a credit score? (CFPB)
• How do I get and keep a good credit score? (CFPB)
• CFPB study on credit builder loans (2020)
• How do I get a free copy of my credit reports? (CFPB)
• Common credit report errors (CFPB)
• Fixed vs variable APR (CFPB)