Why ‘No Credit’ is No Good at All (Especially in Your 20’s)
I was talking to a friend the other day about the trouble she was having getting approved for a credit card. She didn’t have bad credit, however; she had no credit. Like…none.
“I thought I was doing everything correct!” she told me. By this she meant that she always paid her bills on time, she had no debt (and went to school on a full ride) and never charged anything because, well, she was afraid of credit.
And unfortunately, she equated no credit with good credit, a fallacy that once upon a time I believed, too. For a long time – through college and the first couple years thereafter – I had but one credit card. I used said credit card maybe four, five times a year TOPS. I always paid on time, though I always carried a small balance. I was under the impression that I had great credit…And actually, my score was excellent!
So you can imagine my surprise when I was turned down for a measly $6000 auto loan.
As it turns out (and any 20-something looking for a loan with limited credit can attest to), your credit history is really important when it comes to getting approved for a loan, a new credit card, anything related to credit. It’s why I had such a problem getting a car loan, and it’s why my friend is having a hard time getting approved for her first credit card in her mid-20’s.
So, while a local credit union stepped in and saved the day in my case, my friend’s situation is a bit trickier. I told her not to panic (she wasn’t, but I assured her not to anyway); there are ways to build credit even if you have none to speak of and you’re in your 20’s.
First, I introduced her to secured credit cards. For those of you not cool enough to know what a secured credit card is (just kidding, you’re still probably really cool), these are cards that require a security deposit that essentially guarantees your credit line.
“Wait a second,” my friend said to me. “That doesn’t sound cool at all.”
Well, once I explained that secured credit cards are an excellent credit builder, often included credit monitoring tools (so that she could monitor the growth in her newfound credit), are perfect for people with no credit and that the deposit was fully refundable, her tone changed substantially for the better!
OK, so while secured credit cards aren’t the sexiest on the market (they might even be described as ‘homely’), they’re key to building credit when you have nothing to work from. There are also some unsecured credit cards available for people with no credit, but these cards often include a high price for building credit, generally in the form of monthly fees, annual fees and sky-high interest.
“Stick with secured”, I told my friend. I even let her know that after several months – maybe even a year – of spending responsibly with a secured card, she might even receive an offer for an unsecured card, the kind you see on TV offering cash back, miles and rewards. But in the meantime, there were a couple other things she’d have to do to build that credit score; namely, face her fear of using credit.
There’s an old myth that you can get a credit card, make one purchase on it, pay it back and watch your credit score blossom. Unfortunately, that’s not real life.
The consumer with the best credit score is an active credit card user who pays back their, on-time and in full, each and every month. These are the kinds of consumers that are most appealing to credit card issuers; the ones that choose to sit on the sidelines, on the other hand, aren’t as likely to make the team. (i.e. Credit Card application DENIED.) Plus, a credit card account can even be closed by the issuer for inactivity, and you really don’t ever want a closed account on your credit profile.
“Use it or lose it,” my friend replied. “Got it.”
Well, kind of. She mostly got the idea. And she DID get a secured credit card, and I’ve even seen her use it once or twice.
And sure, while it’s going to take a while for her to build her credit score, the good news is she’s got plenty of time to do so. So even if you’re credit-less in your mid-20’s, remember that it’s better late than never to begin building credit.
That said, it’s a good thing she’s not trying to buy a home tomorrow.