Ask the Readers: What if You Have No Credit History?
Tuesday, 19th December 2006 (by J.D.)This article is about Ask the Readers
Elizabeth writes with a common question: what do you do if you have no credit history? Here’s her story.
What would you recommend for a young person who has no credit history, but would like some (without having the long-term hassle of credit cards and credit card debt) because it would make identity verification easier?
I’m a college student trying to get my savings and IRA account (started as custodial accounts when I was 11) switched to my name. However, this company needs some verification of my identity from a third party, even though I showed them my passport, they know my social security number, etc. The traditional way this third party company verifies identity is through credit history, of which I have none (having no credit cards). I could of course, get some statement billed to my permanent address and verify it via fax and paperwork, but I’m wondering if this lack of a credit history will be a problem in the future.
Also, a lack of credit history is inexcusable if you’re trying to get an apartment (where they check your credit and references from other landlords). I live in the Bay Area, and won’t be getting a house any time soon. How have other people gotten around that in the past?
To make it clear, I do not want a long-term credit card. I can’t stress this enough. I have a debit card which works fine and am presently saving towards retirement. I would still like to alleviate future hassle by proving to anonymous bureaucrats that I exist, and am who I say I am.
What about it, readers? Have any of you dealt with this problem in the past? What suggestions can you offer Elizabeth?
Well there are not too many options other than obtaining some sort of credit in order to establish a credit record. This can be a catch 22 because it is hard to get credit without credit (at least the kind of credit you want to have).
One of the easiest options without just accepting any old credit card is to go to your bank and establish some sort of secured credit. Basically you obtain credit, either in the form of a credit card or a line of credit that is secured by a deposit with the bank. So if you want to open a $500 line of credit, you keep $500 in the bank to secure this debt. If you were to ever default on payments, they take the money that was used to secure it.
Otherwise it would be best to have someone co-sign for you on some type of card, like a parent. Again it could be a small amount but at least something to establish some sort of credit.
The bottom line is you need to establish some record as soon as you can. Length of credit is a large determining factor when it comes to credit score so the sooner you can establish a record the better. A lack of credit history, or a very short and limited credit history will provide you with headaches for many years whether it is for a car loan, mortgage or even renting an apartment.
Establish something, even if it does end up being a credit card. Just because you have a credit card doesn’t mean you have to use it. If you get one, use it once or twice for small purchases to activate it and then make the payments so that it gets reported to the credit bureaus. Then if you want, cut up the card or stick it in a lock box.
This may sound harsh, but get over the whole “I don’t want a credit card” thing. You need to have a credit history, and the simplest way to do that is to have a credit card. If you are able to live on a debt card with no problem, then charging a few things on your credit card and paying it off each month shouldn’t be an issue. Just be sure that you don’t get a Capital One card because they don’t have to disclose your credit limit (this can lower your FICO score). You can get one from the same bank you use now to make it really simple, then you just have to do balance transfers within your account. As far as I know, there really isn’t another way around the problem, we live in a credit driven society now, and if you want to play the game, you have to play by the rules.
It sounds like you will be fine though, if you are that on top of things already, you are so much ahead of the game.
While the aversion to carrying debt is laudable it is trivial to get a credit card and build up a basic credit history. I can’t see any good reason not to do it, and the person asking the question seems to already know the answer.
I’m with the first two people. Get a credit card. Put it in a lock box….freeze it in a block of ice…whatever you need to do to not use it, but you need a credit history to get credit when you actually do need it. Who wants to pay 1-5% higher interest when you go to buy a house because you don’t have any experience in having credit?
Note: in reality, you should charge something to the credit card every month so that you can show a history and build more credit. I’d suggest setting up an automatic billing for a recurring expense (that you’re going to have to pay anyway) and then pay the CC bill every month.
Alternatively, you could take out a personal loan, put the money in the bank and pay it back every month (loosing the difference between the principle and the interest). But the CC is a free option, so this seems silly and expensive.
CC are a tools. Tools can be useful or they can cause you to injure yourself.
Yep, what they said. I also refused to get a credit card as a college student, but when I went to buy a new car they charged me 13% interest. (I’d planned ahead and paid it off less than 6 months later, so it didn’t hurt me in the end.) So I bit the bullet and got myself a Capital One card. They were the only company that would give me one. It’s a backwards system but an unnecessary evil. Pretty soon after that I was getting offers from every other company in existence. I switched to a rewards card and still only use it for set purposes (e.g. gas, online purchases), pay off the balance every month, no sweat.
Agree with Brian. Credit cards are indeed tools. In fact, I profit off my credit cards, because I have discipline.
A lot of cards have rewards programs that you earn points for cash back or whatever. If you use credit cards like I do…pay off the balance every month…you still reap the rewards, maybe get cash back and build up a credit score.
I get the fear of credit cards, I do. Both my parents filed for bankruptcy when they divorced and I can see how it affects people. But if you’re disciplined (and it seems that you are) credit cards are not something to fear.
Easy enough!
Ask your parents or a friend who has excellent credit, to add you to their credit card account as a co-borrower. Assure the person that you will never use their credit and you’ll return the card to them (if it is issued) as soon as it comes in the mail.
You will now inherit their payment history for that card on your credit report. The downside is that if they pay the card late then the late will show up on your credit as well.
Choose your source well. Good luck.
You could apply for a loan. Put the money in a savings account. Pay the loan back from the savings account. This may cost you a bit more over time and will establish a positive credit history.
Alternatively, get a credit card. When it comes in the mail activate it and then put in the back of your sock draw.
Does having a credit card mean you have to use it?
Broken record: Just get the card. If you’re responsible enough to recognize the potential dangers of having one, you’re definitely responsible enough to have it, charge a bit to it each month, and then pay that off in full. There’s really no easier way of getting a credit history, and no other entirely-free way I can think of.
Personally, I use a rewards card (Amazon; I regularly buy things there, so I can consider my rewards points a 1% discount on everything) and track my money separately from my actual account balance. That is, I may have $1000 in checking, but if I charge $200, I deduct that immediately from my own books. Now I have $800, as far as my own records are concerned, and when time comes to pay the bill, it’s really just a resynchronization of my books and the official balance. Not that I’m necessarily saying you need to adopt that system, but it’s one method of accident-proofing yourself if you’re worried about overspending on a credit card. (It’s also helpful since it lets me ‘pre-spend’ money for other bills that haven’t arrived yet)
I second what everyone else says. I went through this exact same thing three years ago, and I got a secured credit card through Orchard Bank. For about two years, I charged something planned only every three months or so and paid it off immediately. Now, I leave it at home, set up a recurring charge for my cell phone, and pay it off in full every month. My credit immediately was “acceptable” and I was able to get a lease with no problem, even though that’s the only thing on there.
The only thing I don’t like is that it’s a secured card, so the cc company has $200 of my money that I could have been earning interest on for the past few years, and that it costs me $25 a year as an annual fee. However, this was worth it to me at the time, because now I’m able to get on a lease instead of being in an illegal sublet here in NYC. Next month I’ll be calling them up and asking to a) cancel my annual fee and b) return my $200 and turn the account into a regular credit account, or I’ll be taking my business elsewhere (and the best thing is, since I have some credit record now, I can do that.
When you sign up for a credit card, make sure to update your information at the do not mail site–otherwise you’ll start getting credit card offers like it’s going out of style.
You’ve shown yourself to be extremely disciplined and should’t fear getting a credit card to give yourself *some* credit history. Just leave it at home and forget you have it, and you’ll be fine.
Greek chorus.
Get the card.
I think using debits for every transaction is dangerous anyway. You don’t have consumer dispute protection on your purchases, and there isn’t the same firewall between your bank account and the card.
As was said above, you could get an installment loan, but why pay the interest to prove your identity if you can charge one small transaction and pay it off every month?
I will say that if you simply cannot stomach having your own card, you could become an authorized user on a family member’s card and “borrow” their history. You aren’t responsible for the debt.
Of course, you then have to rely on someone else’s credit rating.
For fun - I thought I would add a twist to the credit card mantra - which is good.
The writer lives with parents and has not moved into the world yet, so to speak.
1.Find out which utilities in her area report to the credit bureau. In Illinois it is NICOR Gas. Then work with parents. Ask them to change the bill over to her, if they are trustworthy (a child knows). Then, keep paying as usual.
2. Been banking at the same place for a long time. Ask for a small $500 personal loan. Make sure there is no penalty for early payment. Maintain payments for 3 months then pay off.
Although, these are different - credit cards are the easiest without involving another.
Kudos to Aimee (post #1) for saying it like it is!
I’ve also read horror stories about Capital One. Here in Canada you can get a secured credit card with a starting limit of $500, which should get newcomers to the credit game in nice shape for building credit IF USED RESPONSIBLY.
You can always start a stooze pot.
Step 1: Get a credit card that gives you the opportunity for a 0% cash dump (ie they give you ‘a little extra cash for the holidays’). To get the 0% you might have to get 2 cards, one with the offer and another with zero % to tranfer it to. VERY IMPORTANT: Make sure to read the fine print and don’t take a card with any fees associated with any part of this process.
Step 2: Borrow the limit from the first card.
Step 3: Transfer the borrowed amount to the second card, if neccessary (the one with 0%)
Step 4: deposit the amount borrowed into a high yield savings account, preferably one that gives you at least 5%.
Step 5: make your payments every month UNFAILINGLY on time. preferably before on time. Its up to you whether to do the minimum payment or not, I recommend making a payment of n / t or total amount borrowed divided by the length of time in months of the 0% contract. So borrow $5K a month and pay $400 a month.
Result: Watch the money you borrowed at 0% earn money for YOU at 5% or greater. Borrowing about 5K should give you $250 free dollars in the first year plus the original $5000 you gradually saved by making payments all year.
VERY VERY IMPORTANT: If at any time you can’t make the payment or your situation changes for the worse, just withdraw the remaining amount from your account and pay off the debt. YOu do not want to get a fee anywhere in the process, as this will diminish any return from the interest you are earning.
“I will say that if you simply cannot stomach having your own card, you could become an authorized user on a family member’s card and “borrow” their history. You aren’t responsible for the debt.”
untrue, at least in my state (Pennsylvania). You sign for debt, you own it. Even worse: if you are an authorized user on someone’s card, and you use it even once to get a latte at starbuck’s, and they decided they don’t really want to pay for that plasma tv they just bought with it, or they up and die, guess who gets the privilege of reimbursing citibank? You do.
While I think that most people would say (and have said) “just get a credit card”, I think that if you don’t want one, you should not get one.
Contrary to popular belief, you don’t have to have a FICO score to exist. The only reason you need one is in order to borrow money. If you are not going to borrow money, you don’t need one.
For renting purposes, you can rent a house or duplex from a private owner who doesn’t use credit history as a prerequisite.
For getting a mortgage, you can use a lender who does “Manual Underwriting”. Where they actually look at your assets and how much money you have rather than just looking at a credit score.
I think if you don’t want to have a credit card, you don’t need to get one, there are other ways to go. It can sometimes make life more inconvenient, but for many people, it works.
Another vote for getting a credit card. As a student it should be pretty easy to go to your bank where you have your checking account and get an very low limit student card. Then buy one thing every month using that card and pay it off at the end of the month.
Not having a credit history will make it extremely hard to get an apartment without a cosigner. It can affect your insurance rates, and limit your employment opportunities. It is wise not to get into debt, it is unwise to refuse to use a credit card at all.
In my experience, my debit card was bad for my credit. It shows up on my credit report as revolving credit with near 100% utilization since the limit shows up just higher a few dollars higher than how much was spent with it in a month. I now use my credit card for most everything for the protections it offers and pay it off every month. It actually saves me money to use my credit card, since my payment is making interest in the bank until the end of the month.
icup, are you sure you aren’t referring to joint cardholdership or co-application? Being an authorized user simply means that the account holder is giving you access to that credit line. You never actually sign for the debt at all.
Bankrate, credit.com, and other sources all state that only the person who opened the account is responsible for the debt. If you have a reference for Pennsylvania law that says differently, I’d like to see it.
I’m in much the same situation having moved to the US from the UK — I had excellent credit there, but credit history doesn’t get shared internationally so here I’m starting from a blank slate.
Hasn’t been an issue so far as I use a debit card and paid cash for my car — but I’d like to start building some credit in anticipation of someday buying property again.
One problem is that without any credit history, getting the first credit card may be tricky — unlikely to score high enough for one with nice perks or a low APR, although if you don’t carry a balance the APR doesn’t matter.
The normal advice to expats seems to be to start with either a car loan (grin and bear it, or repay fast, on the inevitable high rate) or a secured credit card (and again, grin and bear it on the lost interest).
On stoozing (http://www.stoozing.com): I did this a lot in the UK, making several thousand pounds in interest by exploiting 0% offers and interest-free periods, not to mention loopholes that for a while granted loyalty points on balance transfers. My impression is that this is getting trickier in the UK (a lot harder than it used to be to find cards that don’t charge a percentage for balance transfers) and was always trickier here in the US.
And as the questioner doesn’t even want a single credit card, an elaborate payment-juggling scheme is unlikely to suit…
On becoming an additional cardholder on a family member’s card: this does nothing for building the questioner’s *own* credit history, surely?
I have to chime in with the rest who just say “get a credit card.” By definition, a credit history is only possible by obtaining credit.
You could do it by buying and financing a car (big expense and really big hassle). You could do it by taking out a personal loan from a bank (although good luck with that with no credit history). Or you could do it by getting a credit card (no expense and little time required).
On another note, go to http://www.annualcreditreport.com/ (the government’s Annual Credit Report site) and check your credit report. It is unlikely that it is completely empty. If you have student loans, a phone account, or a gas or electric utility account in your name, it is likely that you will have something on there. By billing you monthly, your utility companies are in effect extending a line of credit to you.
Also you can usually obtain small lines of credit through your bank that are attached to your checking account. Usually these are a few hundred up to a thousand dollars. This is usually called “overdraft protection” or something like that. Technically it is a line of credit and should be reported on your credit report.
But, like others, I say just get a credit card because the piddly amounts of your utility bills aren’t going to do much for your credit score. Get one with no annual fee and some rewards that you like. Amex Blue with Rewards is good. I’ve got 6 credit cards, and I profit (or have profited, if they’re currently unused) from all of them. This person seems to have an irrational fear of credit cards, and she should get over it.
I was going to go into more detail but decided to just start my own blog. I have a lot of PF stuff that I want to talk about, including credit cards. The link is http://gamingyourcredit.blogspot.com
Funny you should ask that. I just had the same problem when I applied for a loan to get an engagement ring. The bank that I applied through refused me credit despite a history of regular bill paying and two steady jobs. So, I went to my local bank and took out a CD loan that ended up being only 4% interest (compared to a whopping 13% interest at the other bank) and I put out some of my own savings as collateral since I had $2,000 available. The bill is autodrafted from my account so I dont even have to worry about sending anything in each month. So far, so good.
Just to have another dissenting opinion, I agree with Brian … if you don’t want a credit card, don’t get one.
Yes, we live in a credit-driven society … but that doesn’t mean you have to play the game. It can be inconvenient not to have a credit history, but there are many inconvenient things that are worth doing. Cycling to work instead of riding a car, for example. In fact, it’s been said many times that nothing worth doing is easy.
Spurning all debt and credit cards is an admirable goal, and I don’t think anyone should be discouraged from it. If she wants a credit card, and feels she can manage it responsibly, then that’s fine. But if she doesn’t want it, there are many ways to work around not having a credit rating. It takes a little creativity sometimes, but that’s not a bad thing.
In the end, live by your principles, and don’t let the pressures of society make you abandon them.
Someone who lives in my own head posted on this exact subject yesterday. Elizabeth needs to suck it up and get a credit card. With one she’ll feel more motivated to keep an eye on her credit report especially since she knows something is on it.
Just having a credit card does not condemn you to a life of credit card debt. Being an idiot with a credit card is what condemns you to credit card debt.
Get a CC. You’re being silly not using one really. They are not bad debt, but good debt (if you pay on time); put something like your monthly phone/internet whatever account to bill to it, set the cc up to direct debit the amount (which you will know will be in your account) then its automatic, and just like a debit card, apart from the money staying in your account for an extra 50+ days. Oh, and you’ll have a good credit history for nothing, saving yourself thousands!
I have dealt with ‘little’ credit history when I graduated college. I didn’t have student loans, so I didn’t have anything other than a single credit card through my credit union with a $500 limit that I used exclusively for text books. Everything I tried to do after that point got denied or had horrible rates due to ‘lack of credit history’. It almost seemed that it was bad as having bad credit history. My wife had student loans and multiple credit cards (and everything paid on time, and no debt on the credit card) so co-signing got us where we needed to be. The first thing we did was a vehicle loan for her - even cosigning and putting 1/3 down, we got denied by GMAC, but approved through our credit union (where I was a member for 10 year, and her for 3 or 4). We had no problems a year later applying for a mortgage. It is very tough to establish yourself if you don’t have time.
As for alternative methods of securing an apartment, I’ve heard of the following (I have not done these, but they were suggested to me). These would probably work best with individuals who have discretion over management companies that don’t care.
1) Provide a larger than normal security deposit - i.e., three months worth of rent.
2) Pay the entire lease in full
3) Use a cell phone bill or other utility to show proof of payment
Once you have an apartment, you can use utility bills from that to prove payment history when you go for a loan, such as a car or mortgage.
I really hate to say it since everyone else has said it, but bite the bullet and get a low limit card (if they’ll even issue you one). If you can’t get that, they have a ‘pre-paid’ style credit card that at least reports on your credit history.
Good luck.
Good grief. I posted this from work just before I left to make Christmas sales calls, and when I get back to the office the thread is flooded! You guys are awesome. Here’s my take:
I don’t like credit cards. I sound like a broken record, but that’s how it is. However, credit cards are a fantastic tool for those who already know they can cope with them. My wife, for example, has never had a problem with debt. She’s amazinly disciplined, and uses credit cards as a convenient substitute for cash. Even though I dont like credit cards, that doesn’t mean they’re bad for everyone.
Elizabeth sounds like a smart young woman, somebody who has her head on straight. The very fact that she’s asking this question shows that she thinks seriously about money. I believe that a credit card — especially if used for only a year or two to establish credit — would probably work for her.
There are some great comments here, and I hope Elizabeth gets some good ideas. (She submitted this question a month ago!)
HC, I have a link somewhere or other that (maybe) backs it up. I will see if I can find it later. When I found that little bit of info, I was trying to figure out if a person would have to assume payments on a spouse’s debts merely by the fact of being married, and what I found had language to the gist of, “no, unless you signed for it or were an authorized user, or it benefitted the marriage equally”.
Empirically, I also figure that if it goes on your credit report, it would be hard for you to prove in court that you did NOT authorize any specific charges on the card, but I have no proof of that either way, that is just supposition on my part.
Anyway, I’ll try to find that link later. Like I said, it wasn’t 100% about this topic so it could be I interpreted it wrongly.
That said, since you can’t depend 100% on another person in financial matters (even if you can trust them implicitly, there always could be external forces acting on them), I think the reward of building a partial credit record in this case through this method does not outweigh the risk of being screwed over financially.
I’m sorry, Elizabeth, but you’re going to have to get a credit card.
It’s laudable that you don’t want to get into a credit trap, but as many other commenters have pointed out, just having a credit card does not in itself mean that you will have credit card DEBT. I have several credit cards open that are years old that have $0 balances. (Closing CC accounts can hurt your credit score and is only a good idea if they have annual fees.)
If you don’t get a credit card, it’s going to be difficult and aggravating to establish any sort of credit history.
I would recommend going to your bank and asking for a low-limit credit card from them. Make sure that you get one with no annual fees. You could also get a department store credit card to begin your credit history; often these have 0% interest periods, so you can charge something and then IMMEDIATELY pay off the balance.
If you’re worried about the temptation to charge things once you open up a credit card, do what I do. I lock my CCs up in a safe at home and never take them with me; I only use my debit card, checks, or cash for purchases.
icup, thanks for the reply.
It’s possible that being authorized as a cardholder by one’s *spouse* might give a credit agency more leeway to request payment. In the general case, however, I’m quite certain that ALL charges, even those made by you, are solely the responsibility of your dad/aunt/whoever holds the account.
I agree with you that using someone else’s history involves risks. If the other person doesn’t keep up their payments, the bad history goes onto your report as well as the good. It’s not too arduous to be dropped as a user again and start with a blank slate, but it’s a hassle.
My goodness, these responses are all very helpful! Thanks for the input everybody.
I appreciate all the suggestions, but for the sake of clarity I won’t follow the ones I don’t understand (e.g. the explanations that go into financial abstracts which, to my virgin eyes, read like Klingon). I still don’t like the idea of having a credit card, but I dislike bureaucracy more. If you’re interested, here’s what I plan to do:
1. Go to my bank and ask for a credit card with no monthly fee or, if they don’t give me that, a low one. This would be after the new year and the Christmas season.
2. Set it up so the balance is paid off by my bank account. I don’t have a lot of money in my account, as the place where I live (co-op, not parents) provides food and half of my income goes to savings, in a separate mutual fund.
3. Leave the card at my parent’s house but keep the number on file. Admonish my parents, very sternly, that a credit card is not a toy. Worry self sick about what could go wrong; schedule both to engage in developmental testing and see a psychiatrist. On their dime, of course.
4. Buy a bottle of shampoo, pay off the balance at the end of the month. Wait two months and then buy something of equal value, like a book or a CD. Pay off the balance.
5. Repeat step 4 for a year.
6. I don’t know what to do with the card after I have no use for it; I’ve been told a lot of things about credit cards and am not sure what to believe. Best case scenario is I can cancel it; worst is that I cut it up, bury the pieces in the four corners of El Paso, and learn forty years later that Nicole Richie has been living it up on my tab with their resurrected remains. Thoughts?
It disheartens me to see other students, already in more debt than me, spending a lot of money on things they don’t need, under the banner that they’re already in debt from student loans, so they might as well get in more. This might be where my reticence comes from, seeing this widespread fiscal irresponsibility perpetuated under a banner of apathy and hopelessness.
I commend Elizabeth’s efforts as I am in much the same position. I have never had a desire to own a credit card as my debit card has served my purposes quite well. For one, those who manage to “game” the credit system are the rare exception, and I have nothing but respect for those few. Personally, I cannot shake the notion that the credit system is “out to get me” and at 27, have long ago chosen to not participate in such an adversarial consumer exchange. Also, I feel that even with a steady job and regular income, that my situation is tenuous, and having the constant worry that a mishap may occur that causes me to miss a payment and dip into the “bad credit” realm would be worse than existing comfortably at ease in the “no credit” realm.
However, I realize that I cannot maintain this forever. With a steady income, I am beginning to have thoughts about buying a house/property. I know that I arrive at the table rather deficient with no credit, yet I still fee uncomfortable taking on a credit card. I am very grateful to those who respect Elizabeth’s (and mine as well) position to want to avoid a CC entirely and have posted alternatives. I feel that I may see if I can add my name to a trusted person’s credit card for a short period so as to have something on the books.
You sound like you’re actually scared of having a credit card, and that you think just having one may draw you into debt hell. Unless you know that you do have some kind of compulsive inability to stop yourself from spending, this is not the case. If you do, then - sorry, ignore the rest of this and well done for avoiding temptation!
A credit card is simply one more method of paying for things. You must currently buy shampoo or whatever anyway, so now you just pull out the credit card. So long as you don’t change your purchasing habits, and start to buy things you can’t afford, life will go on just the same. I’m a student, I have a credit card (essential for me to buy flights online, saving me at least $10/flight) and I run a $0 balance. I can transfer money across instantly from my normal account, so my bank balance always reflects ‘money’ I have left, even if the charge hasn’t come through on the credit card.
I don’t know if the parents thing was a joke or not…
Well, I guess I am too late for Elizabeth to actually read this. Given the credit card horror stories, I was also reluctant about getting my first credit card.
However, as Elizabeth learned, it is hard to make financial transactions without credit.
Since Elizabeth mentioned that she is a college student, my first guess would be that she might have a cell phone. If the bills for the phone are in a parent’s name, have the bills transferred to your name. Paying monthly bills is how you start developing a line of credit. Even if your parents are still paying the bill for you, they are helping you build your credit at this point.
Typically, for your first rental apartment in college, landlords want your parents to co-sign.
Though credit cards are scary, if you pay them off at the end of each month, you pay no interest. That means that you have to be vigilant and buy only what you can afford and pay the card off before the payment due date. You are likely watching what you buy with your bank card so that you don’t spend more than you have and start drawing on the bank’s expensive line of credit. The only added responsibility you would have would be paying the monthly bill on time. In my household, using credit cards responsibly means that my fiance and I have one credit card where all of the house bills go. In our case, this includes the phone bill, the electric bill, and the groceries. At the end of the month, we divide whatever is on the household card in half and pay off the bill. Lately, we have had a number of high expenses, and I let my fiance know that if the common expenses don’t shape up, we are going to have to cut back on eating out and slash the gourmet grocery budget.
For the people who are saying if you don’t want a CC don’t get one… you are overlooking a very important factor, it’s not just about cars, and homes. Many employers, especially for the higher paying jobs, are now looking at credit scores as part of their hiring process. So, while there may be ways around the credit history issue, you are truly hurting yourself by not establishing a good history.
When I got my first credit card, I vowed to only use it to pay for gas (which I did not need to do very often at the time) and pay the bill in full every month. I stuck to that plan until my financial situation changed enough that I was willing to put more on my card each month.
I still pay it off in full every month, unless my money is needed for an emergency (very rare) and I have a good credit score because of it. You don’t need to live in fear of credit cards, just respect them.
Just to echo what other posters have mentioned about being added as a signer to another person’s credit card: My parents have a perfect FICO score. When my brother started college, they added him as an authorized signer on their credit card (which they pay off in full every month), and they didn’t even give him a card to carry. They just added his name to the account and then intentionally forgot about it. Several years later when my brother went to apply for an auto loan, his credit report reflected a perfect FICO score, courtesy of our folks. What a nice gift!
What everyone said about getting a credit card, ditto here: get a card, use it, pay it off every month. It’s just another way to pay for things, and I find it more convenient than cash in many cases (it’s a schlepp to get to my bank’s local branch to get to the ATM). Depending on the card, you get rewards, say, 1% cash back, and, as someone points out, unlike a debit card, there’s separation between your payments and your bank accounts. Plus, there’s greater statutory protection for credit card accounts compared to debit card usage.
One thing no one has mentioned so far: get personal finance software (say, Quicken or MS Money) and use it to keep track of everything. Put your credit card purchases into Quicken when they occur: you’ll see your total balances decline, and you’ll know your cash positions. Be sure to take advantage of your bank’s online downloads for all account data, etc., as this helps greatly in keeping track of your finances.
As noted, a credit card is just another financial tool you should have in your toolbox, and if you pay attention to the card and pay it off every month, you’re basically getting free money from the bank (in terms of keeping money in your savings account an extra month). And use personal finance software to keep an eye on everything. Know what you spend, know how much you have.
I started out by going to a small lending company. Because I had no credit history the most they would give me is $500. They gave me a check and a small payment book.
I also did the secured credit card too. This should help you out too.
Once I had a little credit I would go shopping, now here’s where this may or may not help. When you buy something at a store they ask if you want to save XX percent if you apply for a card and put the purchase on there. I did and when the bill came I paid it off. Those cards have such a high rate that I stayed away and didn’t put anything else on them. I just used the to save money and get a little credit history going. If you have your secured card you can practice buying stuff and paying it off each month.
Whose name are the savings and IRA accounts in, if not yours? Your parents or some other relative? Can’t they sign over the accounts to your name?
Don’t go get credit cards to get a credit history. A credit history is no means of identity verification and I would suspect any company that claims that is what they’re using it for. Open credit cards with no balance count *against* your credit history, because they look at you like an accident waiting for a place to happen.
Don’t “use it and pay it off” either. Just don’t do it, because you won’t pay it off every month. Most people don’t pay off their credit cards every month and those that do are lying or exaggerating.
Find another business who will handle your account that recognizes legal government issued identification as something that validates your identity.
Joshuat - Is there any particular reason you’re so convinced that the many folks, myself included, who’ve just posted here saying we pay off our credit cards in full each month are lying or exaggerating? Why is it so hard to believe that we just track our expenses and only spend what we have the cash to cover?
(Also, companies *don’t* claim they’re using a credit history as a form of ID verification - they use it as a kind of “responsibility index.” ie, if I have good credit, I’m probably a mature, responsible individual. Is that a good use of the FICO score? hell no. But that’s what it’s used for.)
I am also a college student who hated the idea of getting credit cards. Too many horror stories and I have a lot of hatred for the whole scam system of the credit industry.
However, an essential part of responsible investment is planning ahead for emergencies. And while I hate the idea of taking out loans, I may have to some day, and just in case I need credit history for the low interest. So I buckled down and got a credit card set up with Bank of America. It’s on automatic bill pay so it pays the entire balance off straight from my checking account, and I get a few days advance notice of the bill pay to make sure I have enough money in my checking account to cover the bill.
Look, credit cards will only screw you if you don’t pay the full balance off every month. Use it interchangeably with your debit card to buy little things like groceries, toiletries, and clothing and just make sure you don’t spend more than you have in your bank account. They’re evil, but a fully manageable one if you understand how they work and don’t overspend.
To James Kew:
I read an article in The Times about someone who moved from the UK to the US and he managed to get American Express to transfer his credit history. I think he spoke to someone in the Head Office and they could look at his British credit history and authorise a card. I think once you have one, its easier to get more.
There are 100 billion good reasons to get a credit card.
Ignore every single one of them!
Seriously, those things are pernicious, deadly, and one of the main sources of personal destruction and grief that is assaulting people and destroying families.
‘Everyone’ thinks they are smart enough to only use Credit cards for ‘good reasons’ like described in the article.
This is the wisdom of our parent’s generation… the generation that was so smart, it got us where we are today!
Me, I hate them things, and will never have one.
By accident I got a credit card activated through my auto insurance company, and it went completely unused for a year. When they mailed me a replacement card and I realized that the open account existed, I closed it. That’s the full extent of my “credit card” credit history, and it occurred years ago. I’ve since discovered that I have better credit than my roommates when filling out paperwork for apartments.
Elizabeth, don’t cancel the card after you’re finished using it - that will erase that particular history from your credit report, the result being it will look like you never had the card to begin with. Not cool, Zeus - not cool.
Also, Aimee is absolutely right about potential employers checking credit history before considering hiring you. At my previous job, one of my duties was to run background checks on potential employees, and we would get red flags for either bad credit scores or insufficient credit history. I now work for the U.S. Government, and they won’t even think of hiring you until they do a thorough check of your credit history.
I think this is and should be a personal decision.
Yes, credit cards can be used safely. That doesn’t mean everyone should get one. I liken it to alcohol and gambling. Yes, some people can gamble or drink alcohol in moderation without being damaging to themselves and others. However, some people just can’t. In the same way, credit card use is a very personal decision. Sure, you can provide facts about what things might be harder if you don’t have a credit card, but I’d stay away from telling some one they can’t live without one.
Personally, I feel anyone who bucks the consumerist / debt driven trend of our society is on the right track.
Too many of these comments seem to be an attempt to convince Elizabeth to get a credit card by scaring her. Sounds a lot like how the credit card industry works in general, preying on peoples fears, etc.
Finally, I’m a bit shocked at some comments that suggest they’re being financially smart by having a credit card for emergencies. Build up an emergency fund of CASH to handle emergencies.
I joined my credit union and over a period of three years, took out and repaid a series of loans. Each one got larger and the time to repay longer.. When I was finished I had a good history.. I found them eager to work with me. They had a program in place for the likes of me.
good luck..
Charles
I’m going to disagree with the other responders. Credit cards are generally a losing proposition. Even the ones with cash rewards aren’t worth it unless you’re doing enough business with the card. IE. buying for investments to resell.
A much better way, and how I developed credit:
1. Invest in a whole life policy. The policy if over a certain amount, is tax deductable, and you can borrow (IE credit) off it’s value after a few years.
2. Purchase a car at a low price. Shop around and find a great deal on a USED vehicle. Mark the car with a “for sale” sign while you drive it, and sell it as soon as someone offers a greater amount than the purchase price! Get another deal for another car lined up while driving the car. A great place to check for deals on cars are your banks and insurance companies. Banks generally sell properties (houses, cars, land) that have been forclosed upon, at decent prices. Insurance companies will total out a car that’s damaged from a accident (fortunately it doesn’t take a huge accident to damage a car), then they’ll have it repaired and resell it.
3. Buy a house. Yes, I said buy a house. You can rent the house (covering the payment), while writing off the house payment as deductable. Try to get a renter interested in purchasing the house. If you can, and can show the house as a primary residence (little tricky, but can be done), then you can write off up to $250,000 in capital gains tax, and still gain equity credit during that period.
4. Go to a alternative lender! There’s a couple of open sourced lending groups on the net. One such is prosper.com. These groups normally offer a much lower percentage rate than other lending institutions. If you can, take out a small loan, then place it in a no fee account, then, using the same open source lending group, loan out the money at a higher interest rate using the same account! I currently have a loan at 11%apr lending at 17%apr. The constant turnover, and positive balance makes me very attractive if I desire to borrow more.
5. Final tip. Poor people buy liabilities with their money. Rich people buy investments. Never, ever, let money accumilate in a bank account. Banks only offer 3-5% interest. Money markets aren’t much better. Index funds aren’t great either, since you can lose money, you have to pay the broker fee, and you have to claim capital gains tax on your earnings.
6. Amazingly, at 37, I own a five bedroom 3 bathroom house with swimming pool, two cars, a storage warehouse where I rent storage (while using any empty space to store other items for my business (short term!), a successful business (A successful business doesn’t always earn moeny, if fact it has no profit or loss, but puts a steady income to it’s employees). etc. The house cost me approx $60,000 and has been valued at $280,000, the cars are for sell if anyone offer the right price, and I rarely drive one for more than half a year. Everything is an investment.
Ben,
I dont care what you or anyone else say you do about your credit card balances. If you are truthful about that, great. But carrying credit cards with 0 balance is still going to show up negative on your credit report.
joshuat,
Where are you getting this information? I have 6 credit cards, none with a balance that I carry over from month to month, and 2 of them have been dormant (no charges or payments) for over 6 months. I look on my credit report and see that the accounts are open and in good status. I look at my credit score and don’t see how it could be much higher.
Carrying a credit card with a 0 balance (and as high of a credit limit as possible) is a GOOD thing for your credit score. A big part of your credit score is your balance-to-limit ratio (aggregated across all your credit lines). If you have a balance of $2000 and a limit of $2500, your credit score will be very depressed. If you have a balance of $2000 and a limit of $20,000, your credit score will be bumped up. This is one of the topics that I will cover in-depth on my blog, hopefully this week.
You don’t need a credit card or credit score to exist. The only way to obtain a good credit score is to go into debt and stay in debt.
Read over your credit card agreements carefully and ask yourself if you really want to do business with companies that impose those type of rules and penalties.
Obtaining a home, insurance, a job, or anything else can be done without a credit score. I haven’t borrowed any money in almost 3 years now. We have about 55% of our mortgage left to pay and that’s it. My goal is to never borrow a single dollar again in my life. I sincerely hope I drive my credit score down to zero.
As a college student looking to build up my credit, I got one credit card and then used it ONLY to buy gas.
I picked that for a couple of reasons. First, I had a pretty fixed amount of gas that I used each month getting to and from work, etc. I knew that I could always pay off my gasoline bill, so I’d never have the problem of having to carry a balance.
Finally, with a card from a gas station — like Shell (the one I have now) — you can get rebates on gas. If you use the same gas station (company) all the time, you can save up to 5% on each gas transaction, which is pretty good with rising gas prices.
It’s a fairly safe way to build credit, because the purchases are consistent, but not so large as to run up debt.
Lacy,
I think that that is a great idea to get a card and use it just for gas. I getting a new card that I would like to use and pay off each month (no really, I am planning on it and will make it happen). I’m thinking that if I was to start by just using it to buy gas I would get use to paying it off, plus because I had this planned I got a card that offers cash back. Thank you a lot for the idea ^_^
I think many of the suggestions are good but ..
Not all secured credit cards report activity to a credit bureau, in other words, some of them won’t help you at all in “building a credit history” — Make sure, if you get a secured credit card it will help, if that is the choice you make.
http://www.ftc.gov/bcp/conline/pubs/credit/secured.htm
[...] What If You Have No Credit History? - Get Rich Slowly asks his readers to answer this question and there are a lot of replies. [...]
I think Elizabeth’s minimal credit card use plan is an excellent one. Though I also agree with the other poster to NOT close the CC account after a year - length of credit history increases credit score also. At least, that’s what the articles I read said when I was polishing up my credit score to apply for my mortgage.
Personally, I got a few credit cards in college and used them to pay for books every semester. I had the cash, and paid off the card when the bill came, but that gave me some larger charges on the account. I also used my Discover card - this was back 10 years ago, when they sent you a check each year on your anniversary for $3.22 or whatever your dividend was. I still have that Discover card, and 5 years later when I got my first car loan I asked the dealer for a copy of the loan approval letter, because it said I had “excellent credit.”
Again: great plan, and best wishes!
p.s. As a student it should actually be ridiculously easy to get a no-fee credit. Citi Card has an entire college student credit card section, and one of those will even give you rewards for a good GPA.
I am a bit shocked as well that someone would be so irresponsible as to tell someone else to “suck it up and get a cc”. Are there hassles about not having a score? Yes. But there are a lot MORE hassles about having debt and/or using a debt instrument. Especially this day and age when you can use a debit card.
I am 37 and was as disciplined as you sound when i was your age. I started out only buying small amounts of stuff i would normally have purchased anyway. Then it grew to everything i would have bought anyway and on and on. It took about 8 years for me to realize that I was in serious debt and needed to do something about it. It just crept up on me. Not that it WILL happen to you, but it could. So is it really worth the risk?
Debt also caused me to not aggressively go after saving for an emergency fund. the back of mind I knew that i could always use the cc as an emergency fund. I also tended to buy more when I used the cc instead of cash. I got “cloned” and had my identity stolen numerous times b/c i used ccs. My life would have been a lot simpler had i done without them.
The truly responsible “adults” will live below your means. I don’t mean that to be insulting but Dave Ramsey’s right, a two-year old will throw a tantrum to get the cereal they want cuz they want it NOW. Just wait an extra couple of years until you have the money to pay cash. Surely if you’re disciplined enough to pay off the cc each month, you can do that.
And don’t even get me started about all the things that have happened to friends and family b/c someone co-signed or put someone on their account.
Why succumb to the norm? why follow the pack? Fight back and refuse to get sucked in. If you’re going to have to “suck it up”, then fight against the system instead of being such a wimp. “suck it up” by refusing to play the credit card game; live like a college student longer than your friends do and live below your means.
I am a landlord and I would never turn someone down as a tenant if they could show me they were financially responsible and that that’s why they have no credit score. Also, they’re right, you can, as i have done, get a mortgage through manual underwriting and then pay it off in 5 years. And, if I ever had a prospective employee who came to me and explained the reason they don’t have a credit score is because they don’t believe in debt, live below their means, and paid cash for their assets (I paid cash for my first small, $40k condo), then I would (oh, and HAVE) hired them on the spot. For someone, in my opinion, to have the courage to stand up for their principles and actually follow through with what they believe — well, that’s someone i want on my team.
I only make $40k, i’ve never made more. I rent out my first condo, have zero debt, a 4-year old car, and a house. I max out my savings. I have zero stress! I live like a queen with all the spending money i have each month. The best part is is that I’ll be a stay at mom in a few years. As an added bonus, the friends that made fun of me incessantly for driving a used Ford Festiva, without AC, (in Houston, mind you) for ten years, well, every single one of my has admired me and wished they had done the same. They’re upside in their cars, have no riterement cuz they kept raiding it due to some “emergency” and aren’t able to, sometimes, maintain their house like they should cuz they spent so much money on buying furnishings on credit b/c at 26 they had to have a showplace. Well, now their showplace is out of date. They’re stuck and can’t do anything b/c they’re not allowed any more credit. think it won’t happen to you? Ha. These are attorneys, pilots, NASA engineers. Now, are they all in that bad? no, but every single one of them has some major issue. I have none.
If you are truly determined to not get into debt, THEN DON’T. Work at it. then you’ll be able to retire like me before your 40 (if you want to).
there. Enough of my soapbox.
I like icup’s stooze pot concept (comment no. 15) but felt the need to elaborate on his assumptions: go figure total earnings if you’re pulling from that $5K every month to pay off the card. Do not use the same money to pay off the card, or face massively diminishing returns. Make it a rule that you limit the payment on the borrowed amount to what you would put in your own savings account every month. Then you have quantifiable returns and credit in the making. Another alternative to the savings or CD account is reloaning that cash on Prosper.com. A bit riskier perhaps, but higher returns as well. Caution: If you do this too many times, your score will fall because of the multiple open accounts with maxed lines of credit.
screw the whole credit card thing. Im in tampa, I go to college myself. i for one do not own a credit card. However, the way i built my credit was had the cable and electric bill under my name. my two roommates had the lease under their name for the apartment, i still paid.. but the cable and electric bill were in my name. that built my credit over the years. Now i dont have any problems with renting or anything like that.
good luck to ya elizabeth.. screw credit card debt. if you cant buy it in cash you shouldnt be buying it.
Probably, I will repeat somebody else’s opinion, but… Many people deny credit cards like those who decide not to drive because they are afraid of crashes and are in the habit of drinking after 6 pm..
A credit card is a convenient tool, but it requires responsibility which many people do not have. It was just an opinion))
Good for you… continue to say “NO!!!” to credit. You don’t need it!!!! Continue to save up for needs, and negotiate/pay in cash.
Take your $$$ to a financial institution that does not require credit as proof of identity.
Use drivers license or state id card, passport, social security card, utility bills, bank checking/savings statements for proof of id/address, etc..
Credit check for apartment - no… show copy of financial savings/investment accounts and letters of recommendation from other landlords, …. or rent from a landlord that has a brain - that can see that you are the one that is financially stable, not the person in slavery to a credit card company. Same for buying a house (when you are ready)- no credit needed just a mortgage broker that has a brain and is willing to work for his fees with a “manual underwrite” on the loan.
I have never had a credit card in my life i pay with cash and only have living expence,we produce are own electricity and bought are house in 1982 with cash and all we pay every year is tax and insurance,now me and my wife have taught are kids the same princables as my grandparents taught me, and they are grown up and living debt free and have there own homes.we do not borrow or use credit! the money we make goes into savings,we can buy what ever we want but we choose not to. the intrest pays are living expences. we are healthy and have no stress,when my grandparents were growing up there was no credit cards. We give to the poor only and always give respect to our elders.
With enough in my life to worry about, the last thing I need is worrying about making a credit card payment on time. I don’t need that stress. I have no credit cards and I am still breathing. Why should I pay a credit company to survive, when I am trying to make myself survive? I pay cash and if I don’t have the cash, I don’t get it. Simple as that. I am not going to make a CC company have record profits, when my grandparents had no credit. Times have changed, sure, but they change only to someone elses advantage.
I am 43 own my own buisness and living well, my credit score is 0. i never owned a credit card in my life, and i dont rely on any credit i pay all in cash just like my parents tought me, i only purchace what i need, and i own my own home, dont owe nothing but my taxes,waterbill,heat/elect/garbage,insurance, I have my own credit and its my safe, and all mine that i have worked all my life. hope you pepole that live on credit cards dont losse your jobs, and wish you well.