No Credit History and Looking for Guidence

[jimmyk]

Name of Card:
Issuer:
Overall Rating (out of 10):
Benefit Rating (out of 10):
Value Rating (out of 10):
Most Attractive Feature:
Least Attractive Feature:
Remarks: Hey all,

So about 5 months ago I decided that it would be a much smarter decision to stop spending money right from my debit card and get rewarded for paying for things through some type of rewards credit card. So I went ahead and applied for a Blue Sky card from AMEX, only to be given a letter saying that I was denied due to insufficient income. This was surprising because I make over $70K and have never had any debt. So I called AMEX and asked about this statement. I was then told I was denied because I had NO credit history (which is true, I was fortunate enough to get a full scholarship for college and have never had any debt at all) and that they wanted at least 2 years good credit history. I expressed my frustration about the miss information concerning my income and didn't get a clear answer as to why I had gotten a letter that said this in the first place.

So, keeping my head up I went to my bank (Citi Bank) and applied for their dividends card. I though this was a starter card and since I was a Citi Bank customer already I figured I was a shoe in. But alas, I was denied from that card for the same reason, NO credit history. When I asked them on the phone what my options where, they told me to get a secured card.

So here I am posting to see if there are any other options other than getting a secured card. If I have to I will go ahead and get a secured card (probably with a $3k deposit), but I really don't want to take 3 grand from my savings to start my credit history. (I thought that they handed out credit cards like candy!) It is also frustrating to have done nothing wrong and to feel like I have been penalized for it. Do I have any other options? Thanks for your help.

[hdporter]

It's a simple fact that the major card issuers want to see good evidence that you'll reliably make timely payments on your credit cards before issuing an account.

One exception to this are "student" cards that are often issued to those with little or no history.

Secured card are one option by which to build a credit history. Generally they don't require a limit anywhere near as large as $3000. One good issuer, Bank of America, will issue a secured card with as little as a $300 deposit. (Of course, your credit limit is set to the deposit amount.) The BA card is attractive because it has a low annual fee ($29) and they have a good track record of converting accounts to unsecured (often within 6 mo), followed by a willingness to steadily increase credit limits.

Another option to "fast track" building a credit history is to have someone make you an authorized user (AU) on their credit card. Although issuers may give varying degrees of credit for this history when considering you for an account, the fact that someone has authorized your access to their account can be regarded as showing trust that attests to your integrity and likely willingness to maintain payments. At present, you'll also likely benefit from a boost to your credit score by being added to someone else's account -- going forward, prospective changes to scoring may limit that benefit. In any case, if a relative or good friend will add you to their account, you'll get the best bang for the buck if the account has been in place for several years.

Two more suggestions credit options that might be easier to obtain now to establish credit. Cards from gas stations and department stores are generally easier to obtain. Because they have limited use, issuers can be more willing to extend the card to those with minimum history. Notable is Target, for which people report a strong success rate.

You might also wish to consider a credit card sponsored by the Hooters restaurant chain (provided you don't might the occasional smirk . They've been reported to be very open to applicants with poor history. It's possible they might consider those with no credit history as well for a modest credit line.

A final suggestion is to join a credit union. These often require some type of group affiliation, but those standards have become very loose. You may be eligible for one associated with your alma mater; some community groups sponsor credit unions; ask around. While credit unions can be initially selective in issuing credit (the credit unions are owned by their members and they're at risk), they tend to be one of the more reliable sources of credit to established members. Join one and then make a personal call to a credit officer, asking what their account criteria are and their suggestions for establishing credit with the credit union. Establishing a line-long credit union relationship can be one of the smartest financial moves you'll ever make.

- Harry

[jimmyk]

Harry, thanks for the thorough response. In an ideal world, I would like to keep my banking central so the Gas/Shopping card through Citi might be a good place to go, I'll look into it. Although Hooters maybe worth it for the story... .

[jimmyk]

I looked into the Hooter's card a bit more and they have a full rewards program! That is impressive. Seeing as the reason I am getting a card in the first place was to spend my money more wisely this is looking like a better option. Not quite the central banking ideal but interesting nonetheless.

If I do go to a credit union, will I need to have a checking account with them as well? Or can I just do a credit card with them. I have always been a big national bank type of guy, but it might serve me well to look into the smaller credit unions in the area.

[hdporter]

Well, it's best to establish some type of basic relationship with the credit union prior to applying for a credit card, although some do encourage your apply immediately upon joining. You can ask what they advise (I suggest opening a checking account, no matter what, so long as it's free and requires only a nominal balance be kept.)

If you latch onto a good credit union, you have every reason to do your primary banking through them if it's feasible. I joined one right out of college 27 years ago and it's been my "main squeeze" ever since. The service I've received is unparalleled by that of most any other financial institution (when I compare notes with others.) This is true, even though my closest "branch" is 60 miles away now. (Who has need of branches these days? Of course, I maintain a basic checking account with a local bank for when I need emergency check cashing, etc.)

As you can see from your own experience, these days having a standing account with a commercial bank usually is good for little more than a small piece of their time on occasion. For most products, it's seldom that you're given preferential treatment over others who aren't present customers. (On an exception basis, you might get a rate discount as an existing customer, such as for a home equity line.)

- Harry

[jimmyk]

I am looking at three options right now (this is two more than I thought I had!)

1. Secured MC with Citi bank. This is the safest option, safest from rejection that is. I am not keen on fronting the money for a secured card, but it is good to know that if all else fails I can always get this one.

2. Target Visa. Interesting. Every so often I will "earn" a 10% discount spree at Target, not bad. And they may just give me a card!

3. Hooters MC. WooHoo. Points and year subscription to hooters magazine! They might give me a card (I am least sure about this card).

Is there anything that I should be considering in the long run with any of these cards? For example, if I get a Target card now and they give me a credit limit of say $500 dollars, is it good to use that much every month and then pay it off to get credit line increases, or is it good to have the card and only use 1/2 of my credit limit a month?

These cards won't hurt my credit in the long run right? (Assuming I pay everything on time and don't go over my limit).

Thanks.

[jimmyk]

One more question:

Is there any reason I shouldn't apply for both the Hooters and Target card and see what terms I get with the cards? If I got both, I would probably close one of the two.

[hdporter]

-- Since you're just starting to build credit, I'd keep any line for which you apply and are approved (provided there's no card fee) -- unless the limit assigned is absolutely insulting. Every line you establish and hold onto now will ultimately build your overall credit history - something that's invaluable when you have a "thin" file.

If by chance someone gives you an insulting credit line (say $200, when others are giving you $1000+), I can see immediately closing the account if the card has only limited use and it's not a key creditor with whom you wish to establish yourself. One ultimate factor creditors look at is your average credit line -- low active limits can hurt you. But if it's a creditor who has a reputation for reliably increasing credit lines (such as Citi and BA), then it's worth keeping as an investment.

-- As things stand, I'd be aggressive and apply for both the Target and Hooters card now. I advise applying for them within an hour or two of each other (the shorter the better). If both pull from the same credit bureau, it's unlikely that your second application won't reveal the first credit pull. But if they pull from different credit bureaus, you avoid either seeing another credit line recently established (something that creditors prefer not to be the case).

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Touching on applications you might make down the road: You want to be selective in your credit applications. Each credit inquiry diminishes your prospects for the next application you make.. Therefore, it's important to be disciplined to only apply for credit that will truly be of value to you and, ideally, for which you have realistic prospects of being approved.

-- This means, for example, generally avoiding department store cards that you won't actively use (don't apply to get a one time 10% discount, unless your purchase is large enough to really warrant it). It also means avoiding cards from issuers that others report as being relatively unfriendly -- in terms of customer service, credit line increase consideration, fees, etc. But, as noted, up front you may want to target a couple of cards that are known to be easier approvals, even if you aren't likely to use them much. (This guidance is more directed to those who are inclined to go out and make a dozen applications wholesale, without any regard to potential card benefit.)

-- It also means waiting to apply for cards which have a reputation of requiring strong scores, until you're reasonably confident you match their criteria for approval. Discover is a card that's notable for requiring a 700+ FICO for approval (reported approvals are mixed for 680-700, and negligible for >680). Surprisingly, Sears is similarly strict (even for its store card --- I was turned down with 680).

Bank of America and Chase were most willing to issue credit to me when I was rebuilding my credit after a difficult period of 2 years of repeated delinquencies. Your circumstances differ, your constraint being that you have little established credit history. However, I wouldn't be surprised if they would be more willing to consider you than other issuers.

You can best gauge which creditors are most likely to approve you via discussions on this and other credit groups (such as "creditboards.com"). There are threads here in which people detail credit approvals and scores. Creditboards also maintains a modest self-reported database of similar information. (All advice -- including mine -- bears a reality check to see if it's really appropriate for you, of course.)

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Ok, I'm running a little rampant with advice and food for thought. Let me address some of the other questions you raise.

-- There's an inclination to think that if you charge up a card to it's limit and repay it with some frequency that this will prompt a creditor to give you a line increase. Sometimes that's true. But I find it's more often not the case. In fact, I sometimes get the feeling that a creditor may fear that if they give you additional credit you might be more inclined to hang yourself with it.

Creditors tend to most value those who show restraint and only charge up most of the line on an exception basis. (And once you establish a few months of strong history on a card, you might go into the store with the intention of making a large purchase and ask on the spot if a credit limit increase (CLI) is possible so that you don't excessively run up your balance against your available line.

So, I advise generally keeping your outstanding balance under 50% of your limit (as you suggest). This has the added benefit of keeping your FICO score strong for other applications. I've seen first hand where running over 70% can cause a serious temporary hit to your score. (Score changes related to balances immediately reverse themselves when you pay the card back down.) Be mindful that most issuers only report your balance to the credit bureaus/reporting agencies (CRA's) when your statement cuts. There's some leeway for your to run up your account between statements prior to your next payment. But don't push the envelope. (A creditor won't look kindly on an account that generally has high utilization - even if statement balances are moderate, and some credit card companies report balances a couple times a month.)

-- The credit options you outline are strong. I think BA should also be on the list for the near horizon. Because they're particularly good when it comes to building credit over time, I think it might be a good idea to establish a secured credit card with them as well. (You might set up the Citi card and try for an unsecured card with BA after 6 mo. If declined, set up a secured BA card.)

-- Just another idea for you. Having 1 or 2 installment loans in your credit history (outstanding or repaid) are good credit builders. Many banks/credit unions will issue a loan secured by savings on deposit (similar to secured credit cards). I've seen credit unions that are willing to lend as little as $500, repaid over 6-12 mo. These can be valuable when you have a "thin" credit file. They're also not a bad savings vehicle. Just try to avoid unusually high interest rates simply because you have little established credit -- the banks have little or no risk.

- Harry

[jimmyk]

Harry,

Thanks for all of the very helpful information. One thing I am not sure of yet, is why I would want more than one card. Is it so that I can have more total credit (say Hooters CL=500; Target CL=1000; and Citi Secured CL=1500 gives me a $3K overall credit limit) or does having multiple cards build my credit score faster by showing that I can be responsible with multiple lines of credit? Any other reason(s)?

Also, taking the small line of credit sounds like a good idea for a purchase. I am still moving into a new place so maybe I will get a nice couch or TV with a small line of credit for 6-12mo. (I bet I could find one with 0% interest for 12mo. which would be really nice). If I do take this option, is there any benefit to paying it all off as quickly as I can or just paying the same amount every month so that it is paid off in 6-12mos.

Once again, I appreciate all of your help here, hopefully others are finding this useful too!

James

[hdporter]

One thing I am not sure of yet, is why I would want more than one card. Is it so that I can have more total credit or does having multiple cards build my credit score faster by showing that I can be responsible with multiple lines of credit? Any other reason(s)?

In establishing credit, opening more than one credit line benefits you because additional open credit reduces your overall credit utilization, it establishes a broader base from which you can obtain CLI's that will further increase your credit availability, and establishing more lines now improves your average credit line age down the road. The last is true now, when you have little other credit on the books. Down the road, when new lines reduce your overall average account age, it works against you. (There are other reasons not to go whole hog in opening credit lines now.)

I am still moving into a new place so maybe I will get a nice couch or TV with a small line of credit for 6-12mo. (I bet I could find one with 0% interest for 12mo. which would be really nice). If I do take this option, is there any benefit to paying it all off as quickly as I can or just paying the same amount every month so that it is paid off in 6-12mos.

It's important to distinguish what I'm talking about here. I was referring to an installment loan. This differs from a line of credit because the loan involves a single disbursement of funds and fixed payments to repay the loan. (Similar to a car loan, but the borrowed funds are for a more general purposes.) A line of credit bears most of the same characteristics as any other revolving line -- notably, you can borrow against it several times, and have the option of making payments against it in a variable amount, usually with a modest minimum required payment (relative to the fixed required payment of an installment loan in the same amount).

Installments loans in your credit history is a positive credit scoring factor. As a whole, individuals who tap a variety of debt sources show a lower default risk than those who use revolving credit alone. This is why I suggest a secured installment loan to build your credit standing faster.

Since you would be tapping savings to effectively fund a secured loan, I advise redepositing the loan funds so that your savings, net of the loan, isn't diluted. Of course, using the funds to make a purchase can make sense if you would otherwise liquidate your savings (undesirable, of course). But this really should be thought of as a credit building move ... not a source of additional credit.

You can, of course, look to borrow on an unsecured installment loan in lieu of a revolving account to fund a purchase. However, unsecured installment loans (also known as "personal loans") typically have more stringent credit qualification requirements.

- H.

[jimmyk]

Thanks for the clarification. I am starting to form a plan. (Which is a good thing)

1. Get a secured card from Citi (this way I can link it to my existing bank account). This will be good no matter what else happens.

2. Apply for both the Target and the Hooters card, simultaneously if possible. This way I can start to broaden my overall credit. (In an ideal world, I will get approved for both, but we'll see and I am not assuming that I will).

3. Look into getting a small loan from my bank if I have a good way to use the funds.

4. Be responsible with my cards for at least 6mos. and then look into getting another non-secured card.

5. Continue responsible credit usage habits.

6. Overtime reap the benefits of my credit and get a more rewarding rewards(or cash back) card(s).

[dondraper]

Target will nearly always start you off with $200. It's just how they roll. Right now, you really have to concentrate on building credit, and not think about this or that as "insulting." You have no credit history, so they have nothing to judge you on... don't let ego or pride get in the way of your progress. You have to start somewhere. And department store cards generally have lower limits than bank cards, so no one will hold it against you. Just take what you're offered, use it responsibly, allow it to age and accept that building credit takes time. It can't be done overnight.

[jimmyk]

Thanks for the reality check. The first two denials were pretty humbling. At this point, I am just looking to start somewhere and grow from there. (I appreciate the heads up on the initial Target Card CL as well)

[dondraper]

It's not easy, I know. YOU know you're good for it, but they have no way of knowing that. Especially in this current economic climate, they're taking a chance.

Macy's is also a possibility for you... but be aware that they may start you off with a $100 limit. Doesn't matter... you're just looking for positive tradelines right now, not money to spend. They're VERY good with increases later on, and if you're approved for Macy's, 9 times out of 10 you'll get Bloomingdale's as well.

I'd get a secured card and get it reporting before applying for anything else. I'd also take out a secured loan on my savings... but in a different way. Buy a CD with the savings, and secure the loan on the CD. This way you'll be earning interest on the CD at the same time. Also, many banks will give you an interest rate break on the loan if you make the loan payments directly from your linked checking account.

[Flxiblemetro]

Try Capital One, they're the best unsecured credit cards for those building or rebuilding thier credit.
My younger sister just recently got approved for a Capital One standard platinum mastercard and she has no credit history at all. No credit history, no problem as long as you have nothing negetive on your/or her credit reports. If she doesn't get approved for an unsecured Capital One credit card, then try going for a secured credit card her bank or credit union.
Good luck.