Thursday, May 15, 2008

The Secret To Building Your Credit And How To Get Your First Credit Card

This is part three in a series on Credit Card Education.

Part 1: General Credit Card Information
Part 2: Credit Reports and Scores Explained
Part 3: Building Your Credit - Your First Credit Card
Part 4: Fixing Your Credit – Tips And Tricks
Part 5: Where To Check Your Credit Reports And Scores
Part 6: Amex Financial Review
Part 7: Store Credit Cards
Part 8: Churning Credit Cards - Tips and Tricks

Part 9: Credit Cards With Great Signup Bonuses

Getting your first credit card
The basic principal of starting your credit history and getting credit cards is to get in the door, by getting at least one company to approve you. Once one company gives you a credit card, if you pay your bills on time and that company reports to the Credit Reporting Agencies (CRA), with time you will build up a good credit report and score. Once you have your own cards and you pay your bills on time and have a high credit limit with low usage, you will see your score start to rise.

Fast Route: Authorized User

This is the quickest route to your first card and a high credit score!
This method will not only get you in the door, it will shoot your score way up! Ask someone who has a high credit score to add you as an Authorized User (AU) on one or more of their cards. Make sure to get added to cards that are at least a few years old, with a high credit limit and with a lot of unused credit.

This poses no risk to the account holder, as they don't need to actually give you a card. All they need to do is call their credit card, and ask them to add you as a AU. The credit card company will send the account holder a credit card in your name, it is their choice whether to pass the actual card over to you. You don't need to use the card in order for it to help your credit.

When you become an AU on a credit card, that card will be reported to your credit report file at the CRA’s! So it will help on all fronts: it will now be considered as if you have a very old credit history, high credit limit, and paid your bills on time for a while!
I have seen someone go from no credit report whatsoever to a score of 800 within a few weeks! This will work better if you get added on to more than one credit card. (Read part one)

Interesting point: Your score can end up being higher then the person who's account you are on, as you are only using his positive accounts! If you get added to an account with a lot of credit used up, it will not be good for your score.

Important: When someone adds you to their account, make sure they add your social security number. Being added as a user on someone’s credit card without having your social added might, and might not help.

Problem: This will not last long!
According to FICO 2008 (FICO changes their scoring method every once in a while), being an AU on someone else’s account won’t help your score anymore. If your credit score is based solely on being an AU on someone’s account, you will find your score disappearing! This new scoring method has not yet been implemented, but it can start any day! Many people are going to wake up one morning with their credit score way down!
Update 12/08: It seems like being an Authorized User still helps, and will probably help for a while longer!

Solution: Become an Account Manager / Joint Account holder.
According to FICO 08, AU's don't count anymore, but if you are an account manager/joint account holder on someone's card, then even with the new scoring method you will be safe.
Or, become an AU, and quickly apply for your own cards.

Build your own credit
In any event, even once your credit score went up because of this method, you should still work on keeping your score high on your own merit by opening your own credit cards and paying bills on time, leaving old cards open, and getting high credit limits with low credit utilization. You never know when the account you were always relying on for your credit score will become a problem for you.

Tip: Writing a low income on your credit card application will probably get you a low credit line, which won't help you very much in raising your score. Don't forget, most personal credit card applications don't ask for your personal income, rather for household income. (Think: parents, spouse, roommate...)

The Slow Route:
If you can’t get someone to add you to their account and you can’t get accepted to any credit cards (often you just get lucky and one card decides to accept you), try one of the following: (Try the first one first)

  1. Store issued credit card. Many stores have their own credit cards. (Macys, Banana Republic etc.) I would recommend signing up in a store for better chances of acceptance. Getting such a card is usually quite easy. Once that card starts reporting your credit to the CRA’s, you will be able to get approved for a regular credit card.
  2. Ask your bank if they would be willing to give you a credit card. Often, a bank will be quicker to give you a credit card if you already bank there.
  3. Student credit card. They are often easy to get, but usually have a low credit limit.
    Here is a sample card: Citi student card.
  4. Secured credit card. This should be your last resort! It’s better not to have a secured card on your report. A secured credit card is a card where you deposit money and can only spend the money you deposited. The idea is that they will report your card to the CRA’s. Make sure that it is a secured card which reports to the three CRA’s. This type of card usually comes with an annual fee.
    Here are two secured cards: Wells Fargo and Bank Of America, you will need a bank account with them in order to apply online. If you don't have a bank account with them, you will need to mail a check.

In all these three cases make sure they are reporting your card usage to the three CRA’s! What doesn’t get reported does not help your credit!


Anonymous said...

How do you make sure they are reporting to all three CRA's? said...

Once you have the card, you can check your credit report and see if that card is on your report. If it's not on the report, call the credit card company and ask them to start reporting it, hopefully they will listen.

Before signing up for a card, you can call them to make sure they report to the CRA's. Citi, BOA and Wells Fargo all say that they report to all three CRA's.

With a store card you have a bigger chance of having this problem. I don't think it is a very common problem, but it is definitely something worth confirming.

Anonymous said...

would you have any idea if being an Authorized User still helps to build credit???
Thank's said...

As of last week it was most definitely still helping. Exactly to what extent, I'm not sure.

Anonymous said...

Do you have any idea if being an Authorized User still helps to build credit? Thanks

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