Employed grad with no debt gets rejected for new card

Opening Credits columnist Eric 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 CreditCards.com.

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Dear Opening Credits,
I'm a recent college grad with a job, savings, no debt, no loans, and I pay off my credit card every month. I have one card through my credit union with a limit of $500. I applied for a Capital One card in order to get cash back, but was denied. Turns out my mom had recently put a $330 hotel room on the card, which means Capital One interpreted me as someone who uses too much of my credit limit (even though my limit is ridiculously low). This also lowered my credit score to 696. What can I do to improve my credit score and make myself more likely to get approved for a decent card? Are there any no-fee cards I should apply for now, or should I wait a while since I've already been declined? I feel like this is all so foolish!  -- Kate


Dear Kate,
It's not clear from your question whether your mom was charging on your personal card, or if you are an authorized user on hers. Whatever the case, the "little" debt she acquired with it is almost certainly one of the reasons that Capitol One rejected your application. And if you are piggybacking on her account, then it's time to make the break and get your own card.

Credit issuers consider two main factors in approval: income and credit scores. You have a job, so unless you're not earning much, the problem is more likely a scoring matter. Almost all credit issuers use scores to help them make a quick decision on who to accept as customers for which products. The FICO credit score is the most common, and it ranges from a low of 300 to a high of 850. The score you cite is good, even with the debt that you're carrying. However, the particular card you wanted may be reserved for people who have scores in the excellent range -- 750 and above.

Before I address what to do about your mother and her debt, you need to know exactly how the FICO scoring system works.

FICO pulls financial information from your consumer credit reports, inputs it into an algorithm, and then produces a three digit score. Here are the five factors it considers, in order of importance and how each relates to your situation.

  • 35 percent: payment history. The credit union credit card that you have is listed on your credit report, and each time you use it and then pay for what you charged is recorded and assessed. This is the weightiest category because lenders value on-time payments above all else. I have a feeling you have been paying responsibly, as you have a pretty decent score for someone right out of college, even with the questionable charge.
  • 30 percent: credit utilization. Lenders also want to see that you can handle lines of credit without descending into debt. By keeping balances under 30 percent of the amount you can charge, you appear to be in control. Because your credit limit is $500, however, that would mean keeping your balance to less than $150. The hotel charge added to your account was well over 50 percent of the allowable limit -- hence the ding.
  • 15 percent: length of credit history. You don't say when the credit card was granted, but the longer it's active and in use, the better your score will be. Since you can't make time flow any faster than it does naturally, you'll just have to wait for this category to work for you. If you are an authorized user, the history of that account will remain on your report and be factored into your scores as long as you're permitted to charge. However, if you are removed from the account, the creditor will stop sending information about it to your reports, so I would suggest holding onto your credit union card until you have been approved for a new card. Then you can feel free to cancel the old one as the credit reporting history on that card should remain on your credit reports for up to 10 years.
  • 10 percent: types of credit in use. Prove that you can handle different types of credit instruments, from installment loans to a variety of credit cards, and your score will get a boost. One card does not a mix make. Yes, I know you're working on it, but when you do get another line and start to use it well, you should see a boost to your FICO score.
  • 10 percent: pursuit of new credit. For this category, less is more. Lenders tend to get a little nervous when they believe a person is shopping for credit too aggressively. It makes you look desperate, which equals risk. So go easy on the applications. One at a time, and be sure to pursue only the cards for which you qualify.

Now you can use this information to your scoring advantage -- and that includes dealing with the balance on your card. Ask your mom to pay it off immediately and keep it paid off. Once your credit report shows a zero balance and FICO puts it into the mathematical model, you should see an improvement. That might take about a month or two, so wait before buying your score again.

After you do get a more accurate reading, you can apply for another credit card that matches not just your numbers, but the rest of your financial situation and lifestyle, too. I see no reason you should not be eligible for a low or no-fee rewards card with a cash-back feature. Look for cards that are marketed to people with "good" to "fair" credit.

Now, in the event that this was your card and your mother used it, don't let this happen again. As the account owner, it is your personal property and sole responsibility. If you give someone else permission to use it, you end up liable for the debt.

See related: When new to credit, top rewards cards may be out of reach

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Updated: 01-21-2018