Personal Finance » Credit Cards » What Is a Starter Credit Card and How Can It Help Build Credit?

What Is a Starter Credit Card and How Can It Help Build Credit?

It’s something of a Catch-22: In order to get a credit card, you need to have a credit history. But in order to develop a credit history, you need to have a credit card.

Traditionally, the only credit card options for people with little or no credit history have been either high-interest rate credit cards or secured credit cards, which means that borrowers must pay lenders a security deposit to get the card.

Consumers who manage these cards successfully often graduate to traditional, unsecured credit cards. More about these options later, but first there’s a new type of card to consider.

Petal is a new credit card that doesn’t require a credit history or credit scores for application. The startup, which received an infusion of $13 million from investors in January, is aimed at young people who may have trouble applying for a traditional card.

Co-branded with Visa, the Petal card only requires users to demonstrate that they have regular income and are able to meet their month-to-month expenses. Right now it’s only available to U.S. residents with a valid Social Security number over the age of 18. To apply, you currently have to request “early access” from the company in order to get on a waitlist.

“Petal is going after millennials, immigrants and other unbanked or underbanked people in this country who are turned away [by credit card issuers] for having a limited credit history,” says Bill Hardekopf, CEO of LowCards.com.

Is Petal Right for You?

People who have the card right now have gotten it through an invitation-only beta stage, says Petal CEO Jason Gross. The company cannot confirm how many users currently have the card, or whether those current credit files are being reported to the three credit bureaus, Experian, TransUnion, and Equifax.

However, Gross says that when the card is available widely, Petal plans to report data to all three credit bureaus in order to help users build up their credit history.

“The beta has limited functionality as the program is being finalized for general availability,” says Gross. “I can report that we are getting close to sending out waitlist invites.”

So should you apply for Petal? Once the card is widely available and the company confirms that it is reporting all users’ credit history the credit bureaus, it could be a good option for someone wanting to build up their credit files. To evaluate your application, Petal implements a unique underwriting model based on your income and other monthly bills and liabilities.

The unsecured card offers credit limits ranging between $500 and $10,000, and a variable annual percentage rate between 14.24% and 25.24%. Users should know that it doesn’t offer a rewards program or balance transfers and ATM cash advances.

Secured Credit Cards for Users Without a Credit History

If you don’t already have a credit card, there are several ways to build your credit history. Petal definitely isn’t the only game in town.

“There are other ‘starter cards’ that are available to consumers,” says Hardekopf.

One of your first options is to apply for a secured credit card, which are specifically aimed at helping users build their credit history. These cards work just like regular credit cards, but they require a refundable security deposit on the account. That deposit is typically equal to the line of credit you will receive.

“It’s easier to get a secured card rather than an unsecured one, because you’re basically taking the risk away from an issuer,” Hardekopf says. “You’re securing the loan with a deposit [and] that deposit basically acts as your credit limit.”

You can use a secured card the same way you’d use any other credit card. You will also have to pay it off in the same way. You’ll receive monthly statements, and you will have to pay off your balance each month or face interest charges and possible late fees. If you ever default on your payments, you will forfeit the security deposit.

But if you consistently make your payments on time and use the card responsibly, you will build up your credit history because the issuer will report your activity to the credit bureaus. After a certain period of time, usually a year, the issuer might even offer the opportunity to get an unsecured credit card with a higher credit card. Or you can apply for a regular credit card with a different issuer.

To find a secured card, see Experian’s list of the best-secured cards. Be sure to determine whether a charge comes with an annual fee, application fee or other charges. Pay attention to the interest rate: Most secured cards are going to carry a higher APR.

Unsecured Starter Credit Cards

You’re not limited to unsecured credit cards if you’re trying to build a credit history.

“There are unsecured cards for people with a limited credit history,” says Hardekopf. “They will come with higher interest rates because someone with limited credit is a risk. And issuers base their interest rates on risk. The lower your credit scores, the higher the risk you are, so the higher the interest rates you will get.”

Don’t stress too much about the rate—your goal should be to use the card in a way that the APR is irrelevant. “Your interest rate should be there to scare you so it never has to be assessed on you,” says Hardekopf. “If you pay your card off in full on time every month, the interest rate will have no effect on you. If you mess up, it will have an effect.”

The Capital One® QuickSilverOne® Cash Rewards card is one option that accepts consumers with a limited credit history. It does charge a $39 annual fee, but offers 1.5% cash back on all purchases, so you can make that fee back if you charge more than $2,600 to the card each year.

Visit Experian’s marketplace for a list of other credit cards that are best for people with a limited credit history.

Finally, you may have a couple of other options available if you want to build credit. If you can get a cosigner on a credit card or become an authorized user on a card belonging to someone with good credit history, you will be able to build your credit file.

The catch: Your negative behavior could drag their credit scores down, so make sure you make payments on time.


Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.