Great degree, great job, but no credit
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Dear Opening Credits,
My daughter just graduated from college in May 2013, started a job on June 28 starting at $45,000, got a great car loan from Volkswagen of America, (some kind of college grad loan that let her lease a car with no credit, just proof of starting a job in three months) -- and she can't get a credit card. She has applied online three times and was denied. Now she has negative marks on her credit. She wants to go for a Capital One Secured Card, but is afraid to get another negative nick on her record. If she goes with this, and she's accepted, how long would it take for her to get a real credit card with rewards? And is it better for your credit record to pay off your balance each month or just the minimum? -- Marian
You'll be happy to learn that your daughter is on the precipice of broad credit approval. Here's what she needs to do to so she can leap over safely, in four simple steps.
- Keep working. Besides credit history, ability to pay is the other key factor that lenders are concerned with when analyzing a person for a loan or line of credit. Thankfully, she not only has a job, but it's well-paying. While she may not be required to provide proof of what she earns, an issuer will plug her information into an income estimation model, which helps determine whether she really has the means to handle the account.
- Make lease payments on time. More good news -- that car lease that your daughter has is being listed on her consumer credit reports! With each on-time payment, her credit score (which takes all the financial information on a report and transforms it into a risk number) increases. After a year or so, she will see a significant uptick in her scores, making her a more attractive credit customer.
- Stop random applications. Because your daughter's credit history is so slim, those denied credit applications are having a stronger impact on her credit scores than they normally would. Scoring models such as FICO weigh some report information more heavily than others. Inquiries (also called pursuit of new credit) are a minor scoring factor. However, because she doesn't have years of great borrowing and repaying activity behind her (which are the major scoring factors), the applications are taking on an elevated role. Too many of these queries are construed as negative, since they may indicate desperation.
- Get that secured card. Credit cards that are collateralized with cash are real credit cards! The fact that money is backing them should appeal to her. These accounts are easier to qualify for than unsecured accounts because the issuer takes so little risk in extending credit. If your daughter racks up a debt but doesn't pay, they can claim the funds held in reserve. Chances are good that she can get that Capital One card, and if she does, she'll benefit. The account will be wholly her own, she can use it like any other credit card and all the activity will be listed on her credit reports. To build a fantastic credit pattern, she'll just need to use it regularly and, yes, pay for what she spent in full each month. The myth of just paying the minimum payment to boost your score is just that -- a myth.
As for rewards cards, every creditor has their own criteria for who is eligible for their product. In general, though, all it takes is a demonstrated history of positive charging and a steady income. She'll know when she's reached that marker when her FICO scores are in the excellent range (mid-700s and above). At that point, a far wider world of credit possibilities will be open to her than they are today.See related: FICO's 5 factors: The components of a FICO credit score, Turned down for secured card. Now what?
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