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.
Dear Opening Credits,
I’m 26. I recently bought a home. I have no mortgage. I am interested in applying for a low interest rate credit card. How do I go about that? — Brittany
I gather you purchased your home with cash? That’s pretty amazing! Without having to appeal to a mortgage company, you didn’t need a fabulous credit report and score. However, you do need one for a premium piece of plastic. Here’s what you need to know and do to get it.
It sounds like you don’t have much of a credit history because you haven’t been borrowing money from a bank. If you did, the financial institution you’ve been dealing with would have been adding all of your activity to the three major credit reporting bureaus. Credit scores, such as FICO and the VantageScore, are generated from that information. Banks and other businesses then buy your reports and scores and use them as a major factor when determining qualification. The better they are, the better interest rates you’re apt to get.
The problem is that you seem to have been operating under the radar. If I’m presuming correctly, you have not had a credit card or loan before. Therefore, your reports are blank and have no score for a credit issuer to gauge.
So how can a credit card company know if you will be a good customer if you haven’t proven yourself to be one yet? When these businesses issue unsecured accounts, they do so based on your past (as well as your income, which I’ll get to in a moment). By allowing you to borrow thousands of dollars with no collateral, they take a lot of risk. You could run out on the bill, and they would only have a few options for recourse: forget about it, sell the debt to a collector at a loss or sue you for the debt.
With evidence of many years of upstanding borrowing and repaying, though, the company can predict that you’ll behave in much the same way with them. In short, a fantastic credit rating is your way of silently saying, “As you can plainly see, I’m nothing short of an awesome borrower. I’ve had many types of loans and lines of credit and have used them all perfectly. And I’ll do it again.”
Still, you can get a credit card without such a demonstrated reputation. You can have someone else with a positive credit history co-sign on an account, but the best way is by offering up a bit of cash. No, not a bribe; it’s collateral. Almost anyone can get a secured credit card because the issuer assumes virtually no lending risk. To get one, you would deposit a set amount of money in a special savings account. The bank then provides you with a credit card, allowing you to charge about the same amount as that sum. If you abandon your obligation, they take your deposit. Simple.
Now back to the income. Only a foolish lender would extend credit to someone who has no money coming in. Therefore, if you don’t have a job, that’s your next step as you’ll probably need one even for a secured account.
Just don’t expect any credit card that you would get right now to be top tier. It may have an annual fee, and the annual percentage rate could be on the high side. But use it well by charging only what you will pay for within the interest-free grace period and sending all payments in on time, and you’ll soon demonstrate responsibility.
After a year, check your credit reports and scores. Odds are that they’ll be looking lovely, and a bank will be willing to take a chance on you with one of their superior accounts.
See related:7 tips for handling your first credit card
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