Okay guys, I need some opinions, and my google foo seems to be rather weak.
I need to get a credit card so I can start building some credit. I had some a long time ago but everything has fallen off my record and any inquiry simply comes up " No recent activity". Now I understand that my rating is in the “good” range because of this but I can’t seem to get approved for anything either. I know that store cards can be easy, but money is tight so one store purchases just to build credit are out. I need something more versatile. I also don’t understand prepaid cards. I already have a debit card, and don’t need to give someone else my money to hold for me.
Difficulty: Capital One is out. They screwed me over badly years ago and I will not deal with them.
Do you have an account with a bank or credit union? That’s the first place I’d try. You could even ask about a secured card, if you can spare a hundred or two dollars; you’re not “out” the security, it’s just put aside in an account and held on your behalf.
Ultimately, once you’ve had the secured card for a while, you should have enough history to get an unsecured one. Even 10-20 bucks here or there (and paid off promptly) should begin building your history.
If you’ve got a family member willing to cosign, you could get an unsecured one right away. Of course, the cosigner is on the hook if you turn out to be a deadbeat so many people are not willing to do so (and reasonably so).
Whatever you do, do NOT go for one of those cards targeted at people who are emerging from bankruptcy or whatever - where the application fee etc. winds up being something like 80% of the credit limit. Those are such ripoffs that they should be (and perhaps will be soon) illegal.
Oh - and rereading the OP, “prepaid cards…don’t need to give someone else my money to hold for me”. To clarify, a secured card is not the same thing as a prepaid card. A prepaid card won’t do jack to rebuild your current credit history. You probably knew that already, just trying to be clear.
Bank of America has a secured card. I was in the same boat as you are, with an excellent past credit history but nothing current because I don’t believe in most debt as a general rule. I paid off all my consumer debt years ago.
Eventually I wanted a credit card to build a another good credit history in order to get a more favorable rate on a mortgage, so I got a B of A secured card. It wasn’t expensive, but the interest rate was high. I made the decision to spend a few bucks on interest here and there because it was going to end up saving me larger bucks in the long run.
Do some reading on this. Supposedly, carrying over a balance from month to month (as opposed to paying things off CONSISTENTLY) makes zero difference in your score.
Looking at my credit reports from the 3 big agencies: they do report what your balance is, but that’s a snapshot at any given time. For example we have one card that we use consistently, and ALWAYS pay in full. My credit report shows that card with a few thousand as the balance vs the credit limit. It also says “pays as agreed” or something similar. It says nothing about a balance being carried over.
My advice (distilled from the above):
[ul]
[li]Get a card with, say, X dollars in credit limit. [/li][li]Charge up to 30% of X on the card. [/li][li]Put that 30% aside where you can’t spend it accidentally. [/li][li]When the card’s billing cycle closes for the month, IMMEDIATELY pay the bill in full. Or at least if not immediately, pay it a day or two before the due date. Do this electronically via the bank’s website, so you KNOW you’ll be credited on time. [/li][li]Repeat every month.[/li][/ul]
You don’t want to go above 30% (approximately) because the scoring systems will ding you if you use too much of your available credit.
Note that your score will actually drop initially because of the recent credit inquiry and the recently-opened account. Average account age does impact score up to a point (I don’t know that average age of 20 years is much better than average age of 4 years, for example).
BTW, when you mention “wasn’t expensive”, do you mean there were fees involved?
Did they pay any interest on the security account?
Just curious; I’ve never had a secured card.
Interestingly, the one account that I’ve had FOREVER is a BofA card. Back in the early 80s, NCNB (later NationsBank, then gobbled up by BofA) offered a “Student Visa” with a limit of 200 dollars, to college students. I got this my Junior year in college and still have that card’s great-great-grandchild in my wallet :).
This is incorrect. Your credit score is helped by revolving a balance. Your own link (the last one) contradicts you:
“In short, the lower a consumer’s credit utilization, the better, but having a small balance is slightly better than having no balance at all,” says Barry Paperno, consumer operations manager for FICO, the Minneapolis-based company that created the popular credit scoring formula.
While banks still make interchange from you using your card, it’s still not as much as if you revolve a balance, so it makes sense that they’d see a revolver more favorably compared to someone who pays off their entire bill.
ETA: I understand the broader point about what the reported balance is versus the actual balance, but the article doesn’t make clear how you can make sure they report your account when you have the balance on it and not zero when it’s paid off.
With the exception of making sure of when it’s reported, I disagree. The scoring model does not know whether the balance that’s reported is revolved, or a snapshot of something that’s paid off.
Really the only advantage of carrying a balance / paying interest is that it does guarantee that they’ll have a nonzero balance to report every month. Personally, I suppose it would be worth a couple of dollars in interest, to revolve for one month, then immediately pull a credit report and see what they reported.
I just pulled my Experian report and looked at the balance for the one credit card we pay off every month. It showed the balance as of the last statement.
Bank of America might try harder to keep me if they see that I’ve gotten a history of revolving and paying them interest. They have no clue whether I pay Chase interest; the credit report does not show that. They do know that I’ve charged x dollars at least at some point in the past and that they’ll get their cut of the initial purchase fees, at least, and that might drive their decision to offer me credit.
Oh, and the last link at least initially supports my view:
"To answer your question, I first want to stress that you don’t need to carry a balance to raise your score. You don’t get extra points for interest paid. What matters are the monthly balances that creditors report to the credit bureaus.
"
And directly after the part you quoted, it says "In other words, a teeny charge does a FICO score good. Use the card on an inexpensive item and then pay off the balance when you receive the bill. The small reported balance will help your score, and you’ll avoid finance charges at the same time.
"
This is why I suggested paying it in full when you get the bill, as opposed to, say, buying lunch then immediately going back to your computer and paying it online - that would indeed result in a reported zero balance at the end of the month. Buy that lunch, move the money out of your checking account so you can’t accidentally spend it, then pay it when the bill comes due.
You just don’t want to get a card, use it once, pay it off, then leave it untouched in your wallet. That doesn’t show ongoing responsible credit usage, to the scoring models.
This problem is easily avoided because, in general, you have several weeks to pay your statement from the time it posts. If the card is being continually used, you will continue to charge things before your bill is to be paid.
I suppose this is the issue…I agree that if it’s reported quickly, you’re right, might as well pay off the bill. Personally, when I’ve run my credit report, some of the information has lagged quite a bit, so I’ve always suggested revolving a small balance to be certain.