I recently graduated from college and just got a decent full-time job. I had not previously owned a credit card and don't have a credit history. I recently applied for an American Express card and got denied because I don't have a credit score. I'm now exploring several options: I have a friend who offered to add me as a user on his card, or my parents could add me as a user on their card, or I could get a secured card. What are the pros and cons of those options? Is one better than the other? Would pursuing any or all of those options help me get a good credit score?
A Credit Karma spokesperson offered the following:
There is no one-size fits all when it comes to managing your finances, the same is true when you’re shopping for a credit product. That’s why it’s important to weigh your options to see what works best for you.
In many cases, if you want to begin building your credit, a secured credit card is a good option. These cards are secured by money that you deposit with the issuer, which reduces the risk associated with borrowing and makes it easier for people to get approved. Secured credit cards are designed for those looking to build or rebuild credit, however, don’t assume you’ll automatically be approved just because you can make the required deposit. Some card issuers may have other criteria you’ll need to meet (e.g. having a bank account), so make sure you read the terms and conditions, including potential fees and annual percentage rate (APR). Typically, secured cards will come with higher APRs than unsecured cards because people with nonexistent credit profiles usually end up with higher interest rates to offset the issuer’s risk.
Alternatively, becoming an authorized user on a family member or friend’s credit card is another low-risk way to build credit. By becoming an authorized user, you’re able to piggyback off of the primary account holder’s credit, which can help you establish your own credit history. Keep in mind, you’ll want to make sure the primary account holder has good credit and uses their credit responsibly before you become an authorized user. Any negative activity carried out by the primary account holder or you will show up negatively on your credit report, which will have the reverse effect on your credit.
Another potential option to explore — on its own or in conjunction with the above — is leveraging alternative data to help you build credit. Alternative data refers to information that isn’t found on credit reports (e.g. rent or utility bills). Some programs like Experian Boost and eCredable Lift, allow you to link eligible bank or utility accounts — these programs look for on-time payments or accounts that they can report to at least one of the credit bureaus (Experian Boost reports to Experian and eCredable reports to TransUnion).
All of these options are available to help those with thin files build credit. However, opening a credit card is not going to get you that good credit score. Here are some steps you can take to build good credit:
- Pay your bills on time. The most important credit-scoring factor is your payment history, so making sure you pay your bills on time is key when working to build good credit. Late or missed payments can significantly harm your credit score, so if your issue is keeping track of bills, consider setting up automatic payments or payment reminders.
- Pay down your debt (also known as keeping your credit utilization low). Credit usage, or credit utilization, also plays an important role in your credit health. Your credit utilization ratio compares the amount of debt you owe to the amount of credit you have. Lenders and issuers want to ensure you’re not borrowing more than you can pay back. A good rule of thumb is to keep your credit utilization below 30%. The best way to do this is by paying off your credit card balances in full each month, or make consistent payments throughout the month — credit card companies will gladly accept payment anytime!
- Don’t open multiple credit cards at once. Every time you apply for a credit card or loan, it generates a hard inquiry on your credit report, which usually stays there for about two years. Too many hard inquiries in a short period of time may turn lenders off because they may think you’re looking for cash or about to rack up a lot of debt.
- Don’t close old credit cards. It can be tempting to get rid of old cards you don’t use but the length of your credit history is a significant factor in most credit scores and you risk shortening that length by closing your oldest credit cards. However, the hit to your scores could also be offset by lowering your utilization rate and making continued on-time payments.
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I recently graduated from college and just got a decent full-time job. I had not previously owned a credit card and don't have a credit history. I recently applied for an American Express card and got denied because I don't have a credit score. I'm now exploring several options: I have a friend who offered to add me as a user on his card, or my parents could add me as a user on their card, or I could get a secured card. What are the pros and cons of those options? Is one better than the other? Would pursuing any or all of those options help me get a good credit score? Subscribe for full article
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