Steps You Can Take to Build Credit, Get a Card
Sacramento Bee, by Claudia Buck
January 17, 2010
Gone are the days when credit card companies barraged you like a love-struck suitor. Today, bruised by economic losses and consumer defaults, many credit card companies are spurning the customers they once wooed. And if you've got a dinged-up credit score or no credit history, getting a new credit card is next to impossible. We know one young man -- a recent college graduate with a decent-paying job and no major credit dings -- who's been turned down for a credit card repeatedly, even from department stores like Macy's.
"Credit is still tight, so issuers are not approving as many people with no credit or bad credit as they did 18 months ago when the economy was good," said Bill Hardekopf, founder of LowCards.com. "It is a very big challenge for them." Those with bad credit have long had trouble getting credit cards or finding cards with affordable interest rates. But those with no credit are in an altogether different category. Typically it's either "young students or the 'under-banked' population -- people who don't have a long history with traditional banking services," said Kenneth Lin, CEO of CreditKarma.com, a San Francisco-based consumer Web site.
"Absence of credit is distinctive," known in the industry as a "thin file," according to Lin. He said it could be newly arrived immigrants or those who have stayed away from traditional banking for loans and financial transactions. Often it's college students, sharing expenses with roommates or getting financial support from parents, who don't have any record of paying bills.
Ironically, the stingier credit card climate is coming ahead of -- or perhaps because of -- next month's installment of the federal Credit CARD Act, which creates more consumer protections by limiting how credit card issuers can impose payments and fees. In the wake of those protections, which started rolling out last summer, a number of credit card companies have hiked interest rates, slashed credit limits and initiated annual fees.
How should you begin your search for a credit card?
Start small. "Do what I had to do when I got out of college: get a store credit card from Sears or a gas card," like Chevron or Texaco, said Ben Woolsey, spokesman for Creditcards.com. But don't make it a hobby. Multiple applications and rejections for a credit card can hurt your credit score. That's why Woolsey and other credit card experts say the best option is a "secured credit card," which is backed by your own deposit. Typically, you open the card with a minimum of $200 or $300, which is your monthly limit for charging on that card, unless you add more money. Some secured cards will let you deposit up to $10,000. The deposit, which earns interest, is not used to pay off your monthly credit card balance, however. It's there as security for the card issuer, in case you default. When you close the account, your deposit is refunded. If you're considering a secured credit card, do some comparison shopping because annual fees and charges vary widely. For example, two of Lin's favorites -- the Orchard Bank MasterCard and the Public Savings Bank Visa -- have very different fees and charges. Orchard's MasterCard has no application fee and a $35 annual fee (waived the first year); Public Savings' Visa card has a one-time $79 application fee but no annual fee. After a year or so of regular payments, you can typically upgrade to a regular credit card with better rates and more flexibility. When you pull it out of your wallet, a secured card looks just like a regular credit card. And because it's backed by money you've set aside, it works similar to a debit card. But secured cards have a distinct advantage that debit cards don't: credit history. Every time you make a payment with a secured card, it's reported to one or more of the three credit reporting bureaus. So assuming you pay it off on time each month, you'll start to build a solid credit history. And what's so great about having a good credit history? That's what leads to your credit score, that oft-cited number between 300 and 850 that affects what interest rate you'll pay for a home mortgage, car loan, etc. The higher your score, the lower you'll pay. If you're a young adult or someone just starting out in financial life, it could save you big bucks over your lifetime. But whatever credit card you get, follow the same game plan: Always pay on time and always try to make at least the minimum payment. The days of credit card offers dropping like ripe fruit may be over, and that may not be so bad, says Joe Ridout of Consumer Action, the San Francisco-based consumer advocacy group.
"Everyone agrees that credit card companies extended more credit than people needed or even merited," said Ridout. Returning to "saner levels," where the ability to charge is more in line with income, will better serve consumers, he added. "There's no doubt it'll cause short-term pain for many borrowers, but over the long term ... there'll be less of an incentive to get in over your head and buy more than you can actually afford."
CREDIT CARD TIPS
With an estimated 1,000-plus credit cards out there, picking the right one can be mind-boggling. Here are some tips:
DECIDE YOUR TYPE Pick a credit card based on how you use it. Bill Hardekopf of Lowcards.com offers this: If you pay off your full balance each month, get a card with the best rewards (cash, airline miles, etc.) for your lifestyle. * If you carry a monthly balance, look for the lowest interest rate. If you have bad or no credit, look for a secured card. (Be sure it reports to the credit bureaus; otherwise, your good payment history won't get recorded.)
CHECK YOUR REPORTS Get a copy of your credit report from one of the three credit reporting bureaus at www.annualcreditreport.com. Check that everything is accurate. If not, your credit score, which is derived from those reports, could be inaccurate.
KNOW YOUR SCORE You can obtain your three-digit credit score for free, but it's often attached to a sign-up for a fee-based credit monitoring service. But you can get an estimated range of your credit score -- for free -- at sites like bankrate.com or myfico.com. Search for "FICO Score Estimator." Knowing your score will help you compare credit card rates.
COMPARE, COMPARE Not all credit cards are alike. Annual fees, interest rates and special terms apply. Be sure to read the fine print. Use credit card comparison sites, such as: bankrate.com, lowcards.com, creditcards.com or cardratings.com.
