The world of personal finance can sometimes put you in a chicken-or-the-egg position. You need good credit to get credit cards, secure a personal loan or a mortgage, and to make many other financial transactions. But what if you haven’t built up a credit history yet? What if you have never had a credit card or taken a loan before? It might sound like having a history with no credit card debt would be good, but that’s not usually true.

Luckily, credit builder cards offer a simple way to tackle the problem. A credit builder card could help you build your credit, or rebuild your credit, and it could help you get access to the credit or loan you need. Building good credit takes time — but the payoff is worth it.

What is a credit builder card?

A credit builder card could be a solid way to establish your credit history. While these are often called starter credit cards, they may also help you pull up a low credit score.

This type of credit card looks like a regular card, and it could be used at most of the same places — but, there is an important difference. A credit builder credit card is a secured credit card. Unlike traditional credit cards, secured cards are backed by a deposit.

To obtain a secured credit card to build credit, you must first give your lender a deposit. This is a security deposit that ensures that the lender will not lose money if you fail to pay your balance. Typically, your credit limit is equal to the amount of your deposit.

How does it work?

Credit builder cards work a lot like traditional credit cards.

Once you have a credit builder card, you could then use it for eligible purchases. You’ll want to remember that the total amount of your purchases can’t exceed the amount of your deposit. Also, keep in mind that this type of credit card is not a debit card—the amount you charge each month is not debited from your deposit. Instead, you must still pay off your balance. If you do not pay your balance each month, you will be charged interest, just as with a regular credit card.

Many cards allow cash advances, just like traditional cards. However, there may be a cash advance fee, so take that into consideration. Some credit builder cards also allow balance transfers, often with a balance transfer fee.

Will I get my deposit back?

While your credit builder card is open, the lender will hold your deposit as collateral. However, if you eventually close your account (and it is in good standing), you will get your deposit back.

Security deposit-required cards may stay open for several months or years. Starting about six or seven months after you receive your credit builder card, your lender may look at your payment history and at your overall credit to see if you qualify to get your deposit back. If you do, you may be eligible for a traditional card at that point. As long as you don’t owe anything, you could also choose to close your account at any time and get your deposit back.

How do I qualify?

Qualifying for a credit builder credit card is easier than qualifying for a traditional credit card. Typically, there is no credit check. The lender will probably ask you to fill out an application that requests some basic financial information, including your income and the amount in your checking accounts.

You must be able to provide a refundable security deposit. Some credit builder cards start with a deposit as low as $200, although this amount can vary

How does the card help me build credit?

Using a credit builder card helps you build credit by allowing you to establish a credit history. Every month, the card issuer should report your credit standing to the three major credit bureaus.

However, remember that using a credit builder card could hurt your credit score if it is not used responsibly. If you fail to make payments on time or you default on your credit card, your lender will report this to the credit agencies. This means that you need to make sure of two things: first, that your combined purchases never exceed the amount of your deposit, and second, that you can pay at least the minimum required amount each month.

What should I look for in credit builder cards?

There are many credit builder cards to choose from. Just as you would with other types of credit cards, you will want to compare interest rates and annual fees. (Pro-tip: Look for a card with no fees at all – they’re out there.) If digital options are important to you, look for a card that has mobile wallet capabilities. Fraud protection is important, too.

Because all require a deposit, you can start by looking at the minimum deposit required by different cards and then make sure you have at least that much in your bank account.

Some credit builder cards even offer rewards, and these rewards may include cash back or a statement credit. Also, look for other features that may be useful. For example, if you travel a lot, look for a card with no foreign transaction fees. If you will need a cash advance, make sure the card that you choose offers this feature.

Conclusion

Building—or rebuilding—your credit history may seem like a daunting task. But a credit builder card could make it easier, once you find one that has the features you need.

To learn more about credit, its many uses and why it’s important, take a look at our robust resource section “Understanding Credit.”