Millennial Money: How to Get Credit When You Have None
NEW YORK – Trying to get your first credit card can be as frustrating as trying to land your first job. Employers want experience, but you can't get experience unless someone hires you. Similarly, a credit card is the quickest way to build a good credit history, but without a good credit history it's hard to get a credit card.
That catch-22 has been tripping up applicants since the Credit Card Act of 2009, which tightened lending standards, making it especially difficult for young people to qualify for credit cards on their own. That's left would-be applicants with less-than-ideal options: Put down a deposit for a secured credit card, piggyback on someone else's good credit as an authorized user, or delay credit building entirely.
This has created an opportunity for startup credit card companies that look beyond credit scores when considering applications. These companies use alternative methods to gauge an applicant's risk and offer cards that don't require a security deposit.
HOW STARTUPS EVALUATE APPLICANTS
Among them is Deserve, which began offering cards in 2017. The company has three cards: the Deserve Classic for people new to credit, the Deserve Edu for students and the Deserve Pro for people with limited credit. More startups have followed with their own cards for people new or newer to credit, including Petal and AvantCard.
These companies have their own underwriting standards to evaluate applicants' creditworthiness based on factors such as income, expenses, assets, debts and banking information. Depending on the company, you may have to provide access to your bank account.
"The way you use a debit card or bank account is highly indicative of how you will use a credit card," says Kalpesh Kapadia, CEO and founder of Deserve.
Cards offered by such companies are an alternative to secured credit cards , which require a cash security deposit that's refunded when you close or upgrade the card. Your credit limit on a secured card will usually be equal to your deposit. The unsecured cards from alternative companies may offer credit limits with more give, if you can qualify.
Startup credit card companies are still evolving, so you may encounter difficulties that you're less likely to see with cards from major issuers. There may not be a mobile app to manage your account, for example, or you may encounter technical issues or delays.
"We are building and improving our product as fast as possible and working on it every single day," says Jason Gross, co-founder and CEO of Petal.
On the other hand, startups are experimenting with features that traditional issuers generally don't offer. For example, the Petal app and website show the interest you'll owe in dollar amounts, so you know the true cost of not paying your bill in full. Deserve waives the usual Social Security number requirement for international students.
YOUR FUTURE SELF MAY NEED CREDIT
Unless you plan to pay cash for all future purchases, big or small, your future self will likely need good credit. Having it can save you money later when you're buying a home or a car, for example.
Anshul Agrawal, a 28-year-old data scientist in San Jose, California, established credit with a card from an alternative issuer. By getting an early start, he qualified for a low interest rate on a car loan. He's now reaping the rewards offered by traditional credit cards. "It's kind of a credit steppingstone," he said.
Alternative credit cards generally report payment information to major credit bureaus — TransUnion, Equifax and Experian. These companies gather the information used to calculate your credit scores. Payment history is the biggest single component of credit scores.
BUILDING CREDIT WITH A CREDIT CARD
Once you get a card, build good credit by making only purchases you can afford. Aim for a credit score of 690 or higher. There are plenty of apps to track your progress. Here are some tips to help you manage your first credit card and use it to build credit:
-Pay on time and in full every month to avoid interest.
-Use less than 30 percent of your available credit limit.
-Keep the account open and active.
-Check your statement for errors.
-Get your free annual credit report .
This article was provided to The Associated Press by the personal finance website NerdWallet. Melissa Lambarena is a writer at NerdWallet