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.
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:
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.
Credit goes beyond borrowing and can impact many aspects of your life in the U.S.
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.
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:
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.
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.
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:
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.
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.
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.
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.