Features to Look for in Credit Building Credit Cards

Credit building credit cards can be the first step to establishing credit or re-establishing your credit score. Most credit cards fall into the category of "revolving debt." This means you can use the credit line as you see fit, paying down as much as you can afford on a monthly basis and revolving any debt you cannot pay off until a later date. It is important to have some revolving debt on your credit report, so these credit cards can be a great tool if they include the right features.

No Prepay Options

A prepay credit card may seem like a good option; you do not need a high credit score to secure one, and you can easily manage your payments. However, contrary to some confusion, these cards do not actually build credit at all. Since you prepay the sum on the card, you are not taking a loan. Without the extension of any credit in your name, these cards will not even appear on your credit score. This fact, plus the financing fees you pay to keep the cards active, make prepay cards a bad option in all but a few rare cases. They can be helpful if you do not qualify at all for credit, but they will not help you build your score.

Low Interest Rates

One key feature to build your credit is to keep your interest rates low. If you have a high interest card, you may find it challenging to keep up with your payments and the expense of the card itself. Anytime you miss a payment, fail to pay down your balance, or otherwise cannot afford your card, you may face a drop in credit instead of an increase.

Unsecured Options

A credit card can either be secured or unsecured. With a secured card, you place collateral in exchange for the loan sum. If you default on the card, the lender can seize the collateral. While secured loans have many benefits, including generally lower interest rates, they also do you a disservice in terms of credit building. The asset you place as collateral has a lien against it, meaning it is no longer considered an asset wholly owned by you. The lender will own a piece of the asset until your loan is paid off. This will adversely affect your debt to asset ratios. In general, an unsecured credit card will help build your credit faster. In addition to leaving your assets in tact, it shows you qualified for a loan without placing collateral down.

High Limits

If you have a balance higher than 10 percent of your credit card limit at any given time, your credit score may decrease. In order to make this "lower than 10 percent" requirement feasible, your balance should be relatively high. For example, if you have a $4,000 limit on your card, you can carry a balance up to $400 without damaging your credit. If your limit is $400, on the other hand, your balance must remain below $40 in order to keep your credit high.



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