When no credit history leads to card rejection


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I am a graduate student on a full scholarship, I have no debt. I have an internship and am making money. I receive a monthly stipend, too. I will have no debt in the next year. I applied for a Chase credit card and was denied because I do not have a history or have not held an account for a sufficient time. What do you recommend I do if I want to start building credit? -- Jamie


Dear Jamie,
Frustrating, isn't it? I've often heard this conundrum referred to as a Catch-22. It's a poor analogy, however. Coming from the eponymous book, it's a negative situation that a person can't escape from because of contradictory rules. In your case: In order to get a credit card you first need a history of using a credit card. Yet this is not necessarily so.

You have what is called a thin credit file. It's so skinny that it is virtually nonexistent, which makes you a mysterious figure. Credit card issuers want to get to know their perspective customers before making an offer. Therefore, these businesses check an applicant's credit report and credit scores to determine if the person appears to be a good or bad credit risk based on what he or she has done in the past.

But even empty files can reveal something positive to a potential creditor: that you aren't in debt. If you were, it would be listed on your consumer credit reports -- TransUnion, Experian and Equifax. Because credit utilization is a major scoring factor, you aren't being downgraded for having balances close to or at your charging limit.

What is not evident is the way you handle a loan or line of credit. Most importantly, if you pay on time, every time. Naturally this is paramount to a credit card issuer, because there's little they dislike more than lending money and then not getting paid back as agreed.

Your first step to building a credit history (in order to show the world that you indeed know how to manage your accounts well) is to check out the different options that are available to people with no or limited credit history. You'll be pleased to know that there are plenty of issuers eager to take a chance on a newbie. The card types fall into three basic categories: secured, unsecured and prepaid. Ignore prepaid cards as loading up a card with your own money isn't a loan and, therefore, any activity associated with a prepaid card account is not reported to the credit bureaus.

As you'll soon notice, there are more secured cards than unsecured cards for those who've not yet proven themselves as excellent cardholders. That's because secured cards are guaranteed by a cash deposit you make with the issuer. If you charge up the account and then don't pay, the issuer can claim the funds held in reserve. For that reason their risk is greatly minimized. There are a few unsecured cards available, too, so check them all out. Focus on the product that seems to be a fit for both you and the issuer.

I'm making suggestions to you based on the presumption that you're at least 21 years of age and that you have an income. The paid internship should suffice. However, if you're not quite of age at this point (and are one of those child prodigies who started college as a young teenager) and don't have sufficient income, you would need to get someone who has good credit to co-sign on the account with you. 

Once you have the credit card with your name on it, you can begin to establish a great rating pretty fast. Charge small items frequently, but pay the balance in full and always on time. Every month that information will land on your credit reports, creating a traceable history. More, credit scores, like the FICO, will take that data and turn it into numerical ratings. Over the span of a year, you will see your numbers steadily climb. 

So now you see that you are not confined by silly rules, but just need to adjust your expectations. Start small, charge responsibly, then work your way up the credit ladder. You got this.

See related: Options for overcoming thin credit, How to build credit with a student loan, Length of credit history matters more when you're young 

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Published: April 1, 2015

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Updated: 10-26-2016

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