When I opened this blog, I had in mind the picture of myself back in January 2012, half a year out of college, and having no credit. Today, it is about a year from that, and many from the next generation of college graduates are probably having the same credit situation as I was. I was lucky to be well-guided by knowledgeable friends, and I thought it’d be my turn to provide a mini-guide for those looking to obtain their first credit card.
To recap what I wrote in my most popular post to date: Introduction to personal finance, here are the 3 main reasons you need a credit card in order of importance:
- Establishing a credit history for future loan and mortgage applications
- Warranty extension and purchase replacement
- Cash back/point/mile rewards
Normally, to obtain a credit card, you’d need to prove your creditworthiness through a credit profile. However, without a credit card or a loan, you do not have any credit history. Thankfully there exist several options to overcome this catch-22 situation: being an authorized user on an existing credit card, credit cards from your bank, secured credit cards, and student credit cards. In each part of this 4-part series I will analyze each option.
Option 1 for credit builders: being an authorized user on an existing credit card.
Getting added to someone else’s credit card is the fastest and surest way to establish a credit history. If a family member adds you to his/her account, this account will show on your credit report, with the full history and status of the account. If your uncle Tom has a 20-year-old credit card and adds you as an authorized user, you’ll have a 20-year-old credit card on your credit report. What’s better, uncle Tom never has to hand you a card or allows you to use the account in any other way. He simply registers you as an additional card user, gets the card sent to his address, then destroys the card without even activating it, and you still have a 20-year-long credit history.
Does this sound too good to be true? Here’s the catch: if uncle Tom misses a balance payment, this missed payment will appear on your report as well. Your nominal account is only as good as the original account. If your family member is a responsible credit user, the potential benefit of having his/her account information on your credit report is huge. If uncle Tom is concerned about his account privacy, assure him that the report does not show the full account number.
Here’s another catch: some credit reports will show a ‘date reported’ field which displays the date you are added as an authorized user. Through manual review, a process in which a human credit analyst analyzes your credit information, it will be obvious that you have not had the account for 20 years. As far as credit scores go, however, the full 20 years history will count. Without any credit, you will not have a FICO credit score. By being an authorized user, you may have an 800. No further catches that I can think of.
3 thoughts on “Credit cards for credit builders: what are your options? –Part 1”
I’m curious of how long it takes for the affect of removing myself from au credit cards will it take to reflect on my credit report.
I know that billing cycles generally are a month behind the credit bureaus as far as payment history is concerned. Does it take a billing cycle to reflect changes in the au department a full billing cycle as well?
The time it takes for the removal of an authorized user to be reflected on the credit report depends on the issuer’s habit of reporting. Bank of America tends to report any change the moment it happens, while most others only report once per month. Once an account change gets reported to the consumer reporting agencies, it will be reflected on your credit report soon after. Hope that helps.