Many Americans instinctively pull out a credit card to buy a $1 candy bar the same way that they would a $1,000 computer. And according to a 2019 Consumer Financial Protection Bureau (CFPB) report, nearly 170 million Americans (about 72% of adults) have at least one credit card—and many own more than one.
Why the craze for credit cards in the U.S.? They often offer rewards, have stronger fraud liability protections than debit cards and allow you to pay off large balances over time. Credit cards can also play an important role in helping you establish and build your credit.
The U.S. credit system
Credit works differently in the U.S. than many parts of the world, and a basic understanding of the system can help you start building your credit score.
In short, here’s how it works:
- Credit card issuers, banks, credit unions and other financial institutions can choose to send information to the three major credit bureaus—Experian, Equifax and TransUnion. The bureaus also actively collect data such as bankruptcy records from public court systems.
- Credit bureaus create credit reports by matching the information in their database with personal identifiers such as your name and address. A Social Security number (SSN) can be one of these identifiers, but you don’t need an SSN to build credit.
- Credit scoring companies, namely FICO® and VantageScore®, create computer models that analyze a credit report and create a credit score. Creditors use these scores to quickly understand how risky lending money to the person could be. Many credit scores range from 300 to 850, and a higher credit score indicates to lenders that a person is less likely to miss a payment. On-time payments, having a mix of different types of accounts, low credit card balances and a long credit history can help your scores, but missing payments and high credit card balances can hurt your scores.
- When a company checks your credit, they’re requesting a copy of your credit report, and often a score based on that report, from one of the credit bureaus. If the bureau doesn’t have any information about you in its database, it can’t return a report a score. Some creditors won’t let you open a new account, or won’t offer you favorable terms, if they can’t see that you have good credit.
A credit card can help you build credit because most major credit bureaus report your account and activity to all three credit bureaus. (Some smaller card issuers only send information to one or two bureaus, or may choose not to report your account at all.)
You also don’t need to use your credit card all the time to build good credit. For example, you could use your card for one small monthly purchase (such as a subscription) and then set up automatic monthly payments to pay off the balance. Your on-time payment history will show responsible use of your credit card, and your creditworthiness may over time improve as a result.
For people who move to the U.S. from countries that don’t have a similarly vast credit system, the importance of credit in the U.S. may come as a surprise. Even if you never take out a loan or open a credit card, having good credit can make life easier and save you money.
Why is credit so important in the U.S.?
Credit goes beyond borrowing and can impact many aspects of your life in the U.S.
- In many states, your credit history can impact your auto and renters or homeowners insurance rates. Having good credit could lower your bills and help save you money.
- Some employers check your credit history as part of their job application and review process. A poor credit history may prevent you from getting a new job, or keep you from moving up in your current company or field.
- Landlords may also review your credit history and score before agreeing to rent you an apartment or home. If you have bad credit, you may have to pay a higher security deposit. Or, you might not get approved at all.
- Mobile phone, internet and utility providers sometimes require new customers to send a security deposit if they don’t have good credit.
If you might borrow money in the future, having excellent credit can help you qualify for the best loan terms and lowest interest rates. It’s also important if you want access to the best credit card offers and higher credit lines, as those cards tend to have stricter minimum credit requirements.
Get a credit card without a credit history
Many people born in the U.S. start building credit when they take out a student loan, open a student credit card or become an authorized user (a type of second cardholder) on a parent’s credit card account. Alternatively, the secured credit card is another popular option.
Secured cards are designed for people who are new to credit, or who made mistakes in the past and want to repair their credit. To open a secured card, you’ll send the card issuer a refundable security deposit, which will usually determine your card’s credit limit (i.e., your total available credit before your card starts getting declined). The issuer can keep the deposit and close the account if the cardholder falls too far behind on payments.
With responsible card use, cardholders can improve their credit and eventually qualify for unsecured credit cards (which don’t require a deposit). They can then close the secured card and get their refundable deposit back, or some card issuers will proactively upgrade accounts and refund deposits.
Because secured cards are generally offered to people with no, poor or fair credit, they can sometimes have annual fees, high interest rates and lack cardholder benefits.
Fortunately, there are good credit cards for people who don’t already have a U.S. credit history. For example, Discover® and Capital One® offer secured cards that don’t have an annual fee and allow you to make additional deposits to increase your credit line.
There are also a few unsecured cards that offer cash back rewards, no annual fees and don’t require a credit history. Here are two examples, with a quick overview of the card details:
Petal Cash Back Visa® Card: There’s no annual fee, foreign transaction fee or late fees, and you can qualify by linking a checking account or savings account if you don’t have any credit history. You can also earn 1% to 1.5% cash back on purchases (depending on how long you’ve had the card), and Petal reports to all three credit bureaus.
Deserve® Classic: Another unsecured card option that doesn’t require a credit check and has no annual fee or foreign transaction fee. The card also offers extended warranties on eligible purchases and up to $600 in mobile phone insurance if you use the card to pay your phone bill. However, there’s no rewards program and Deserve only reports to TransUnion and Experian.
Get a credit card with your international credit history
Through a partnership between Nova and American Express, U.S. newcomers from Australia, Canada, India, Mexico and the UK can also use their credit history from their home country to apply for a U.S. Amex card (here’s a guide on how to do it). American Express will report your card account and activity to the credit bureaus, allowing you to establish and build credit in the U.S.
There are many Amex cards to choose from, including these top picks:
Blue Cash Everyday® Card from American Express: A good pick if you want to earn rewards without paying an annual fee. The card offers 3% cash back at U.S. supermarkets on the first $6,000 you spend each year, and 2% cash back at U.S. gas stations and U.S. department stores. You’ll earn 1% cash back on other purchases as well. However, watch out for the foreign transaction fee.
Platinum Card® from American Express: Amex’s premium card is loaded with perks, including hundreds of dollars in annual statement credits for travel and shopping, and automatic elite status in two hotel loyalty programs. There’s also no foreign transaction fee and you earn bonus points on eligible airline and hotel purchases. But the card’s $550 annual fee is one of the highest around, and you’ll want to carefully consider the pros and cons.
Blue Cash Preferred® Card from American Express: An inbetween option that could be a good fit for families. The card has a $95 annual fee, but you can earn 6% cash back at U.S. supermarkets on the first $6,000 you spend each year, 6% on qualifying U.S. streaming services, 3% on transit, 3% at U.S. gas stations and 1% everywhere else. For some households, the high rewards rates can more than offset the annual fee. But again, there’s a foreign transaction fee to watch out for.
As a major issuer, Amex offers online access to your account and has a mobile app you can use to manage your account. You can also receive access to a free credit score and report, which you can use to monitor your credit building progress.
Choosing the right card
There are many types of credit cards available, and the right card will depend on your circumstances, lifestyle and goals. If you’re looking to build credit while minimizing your expenses, you may want to choose a rewards credit card that doesn’t have an annual fee and reports to all three credit bureaus. Or, if you’re interested in earning lots of rewards and getting extra cardholder perks, a card with an annual fee might be worth it.
Sometimes, card issuers waive the annual fee for the first year to let you try out a card. But make sure you mark your calendar for the end of your first year so you can close or potentially downgrade to a no-fee card if you don’t feel like you got enough value.
No matter which card you choose, try to track your spending and only make purchases that you can afford to pay in full by the due date. Credit card debt often has a much higher interest rate than other forms of consumer loans, and it’s best to avoid interest charges when possible.
If you do wind up with a higher balance than you can afford to pay off, still make at least the minimum payment by the due date. Doing so will ensure you don’t wind up with a late payment on your credit report, which could hurt your credit scores.
To learn more about managing and building credit in the U.S., check out Nova’s many posts on the topic in our resources section.
More from Nova Credit:
Credit cards for no credit