Secure Your Way into Having a Credit History

I recently met up with a friend of mine who started looking into buying a house, but has no credit history. ‘None at all?’ I asked? She moved to the US only a few years ago, so she never had the benefit of building her credit history as an authorized user for her parent’s credit cards. She doesn’t have US student loans, her utility bills are included in her rent, and her company pays her cell phone bill. She bought a used car and paid for it in cash.

Although it seems like a catch-22, where you need to have a credit history in order to get credit, there may be a few ways out. The most reliable one, which I suggested to her, is getting a secured credit card. Several banks and credit unions offer secured credit cards, which require customers to deposit a certain amount of money as collateral. This deposit, as long as it stays in the bank, generally becomes the credit card holder’s line of credit. Basically, this is a credit card that requires you give the maximum amount you’d like to be able to charge on it – your line of credit – up front. This way, you build your credit history by using it as any other credit card, receiving a statement and paying your balance every month, while the bank has access to your deposit in case you default on it.

Secured Credit Card (from Capital One)

If you decide to close your secured card, say, because you “graduated” into receiving offers and getting approved for an unsecured credit card, you get back the deposit you made for your credit line. There may be some fees, however, for maintaining a secured credit card that end up biting into your deposit, so it’s worth shopping around before settling on the right one.

Below is a sample of a few secured credit card offers out there, with a wide range of minimum deposits and fees.

  • BankAmericard Secured Credit Card ­­– the credit line for this secured credit card offered by Bank of America varies from $300 to $4,900 and is determined by the Bank according to your income and the minimum deposit you would like to make. Your deposit does not earn any interest (it is placed into a ‘Deposit Account’), but after 12 months you may be eligible to “graduate” into an unsecured card and get your deposit back. Annual fee: $39
  • USAA Secured Credit Card– the deposit you make for this card, which can be between $250 and $5,000, is placed in a 2-year Variable Rate CD. On one hand, this means your deposit is locked in for two years, but on the other, at a current annual yield of 0.74%, it has one of the highest CD returns out there. This secured card is available as an American Express and a MasterCard. Annual fee: $35
  • US Bank Secured Visa – you can make a deposit from $300 to $5,000 into a US Bank Savings account, which currently yields 0.05% per year. Your line of credit is written out for the same amount as your deposit, and US Bank reconsiders cardholders for an unsecured credit card after 12 months of good standing. Annual fee: $35
  • Wells Fargo Secured Visa – users can deposit $300-$10,000 for this card, all of which becomes the card’s line of credit. This deposit, however, does not earn any interest (it is placed into a ‘Collateral Account’) so if your goal is to establish credit it is probably best to deposit close to $300 and pay the balance off in full every month. You can deposit any extra money into a savings account or a product that yields at least some interest. Annual fee:$25
  • Capital One Secured MasterCard – this is technically a hybrid between a secured and unsecured credit card. The minimum security deposit ranges from $49 to $200, but the starting credit line starts at $200. So, if you are deemed fairly safe, you may be required to only make a $49 deposit for a $200 credit line. This is a great advantage, as it doesn’t force you to lock in as much money in collateral. Any additional deposit you make over your required minimum translates into a higher credit line, up to $3000. Annual fee: $29

In deciding how much to put down as a deposit, consider your reason for getting a secured credit card. If you plan on only using your card for a few small charges each month, you may as well make a deposit close to the minimum requirement rather than lock in more of your funds into low- or no-yield accounts. On the other hand, if you see this as a step into embracing a credit card-filled life, it may be worth making a larger deposit so that you can get used to statements and paying off balances that more accurately reflect those you expect to face once you have better access to credit. But whichever you choose, don’t forget to pay off your balance in full so that you don’t erase the benefits of having a secured credit card with the ding of a default on your credit history.

And once you’ve proven your creditworthiness with your secured card for a year or so, start looking for unsecured credit cards. Yes, you too can eventually have one of those cards that doesn’t require locking in money upfront and earns rewards!

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Look Out for Credit Cards that Are “Yours” but Aren’t With You

Recently I got an automated email from Citibank letting me know that my credit card “statement is ready to view.” It was not spam and contained the email security zone, which states my name, the last 5 digits of my account, and since when I’ve had the card. The problem? I don’t have a card with those last 5 digits.

I called Citibank to check whether there was a glitch in their automated system, but the customer service representative (CSR) confirmed that there was in fact a card open in my name with those last 5 digits. Luckily, there were no charges to it, but apparently it had been open for a year now. I asked for him to securely close that account, and, since I already had him on the phone, asked to make sure that there were only 2 cards to my Citibank account – the two cards I actually own. He found those and two more. There were three cards to my name that I never actually had!

None of the three cards had any charges to them, but because I do not actually have any of them their very existence was enough to scare me. The CSR was able to securely close two of them but had to write out a manual close request for the third, so I will call in a couple of weeks to check up on that.

But this is what I’ve learned from this experience:

  • Read your credit card emails. Just because you get them every month doesn’t mean they are always the same. For some reason the card that triggered the notification had been open for a year but I never received any notification about it other than this one. Nonetheless, I opened and read through it because it came to a different email address than the one I use for my credit cards. Had it been sent to my other email, I might’ve never found out about it at all.
  • People worry about the impact that opening too many credit cards or closing a card might have on their credit score, but there’s something a lot worse: open credit cards that you don’t physically have. I am less worried about the ding on my score that the inquirer(s) may have caused by opening the card or the dent I may have made by closing all three cards at once than about the possibility that someone could’ve actually used the cards. I do not understand how the card application happened, and why someone would have a card on my name and not use it for a whole year, but I think I’m lucky. If any of the cards had been charged, my score and I would be in much bigger trouble.
  • Call your credit card company just to check what they have on file. You should definitely do that when you get a strange notification like I did, but I would recommend also calling every year or so just to make sure. Even though my “statement notification” email came from Citibank, I am calling Discover as well to verify that they really only have one card on file for me. You never know what you’ll find out – I only got the notification for one Citibank card, but once I had the representative on the line and asked him to check, he found 2 more.

I was lucky that nothing had been charged to any of the three cards I had never opened, and I hope that you are even luckier than I am and don’t have any fraudulent activity to your name at all. But with credit cards, better safe than sorry is the rule. Even if you think you’re lucky, it’s better to call and check than find out the hard way.

Tip of the Week: Get in the Habit of Checking Your Credit Report

The Fair Credit Reporting Act guarantees each person free access to a credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion) every twelve months.  It is generally good practice to periodically check your credit report to make sure it is accurate and that there are no suspicious, fraudulent, or unauthorized activities.  In another month, we are hitting a four-month mark in the year 2010.  If you have not ordered a credit report yet, now is the perfect time to do so.

One option is to order all three reports at once so you can compare them.  Another plan would to be alternate every other year between spreading your credit reports throughout the year and requesting all three at once so you can get the best of both worlds.  And remember to get your credit history from AnnualCreditReport.com, because it is the only source authorized by the Federal Trade Commission to provide free credit reports to consumers.

The Score That Really Matters

While your SAT, GRE, GMAT, MCAT, or LSAT scores will cease to matter once you have graduated from college or graduate school, there is one score out there that will follow you the rest of your life: your FICO credit score.  This number is used by various parties,  from prospective landlords and employers to institutional lenders to insurance agencies, to determine your credit riskiness.  A higher score (850 is the maximum) shows that you are fiscally responsible, making you less likely to default on monthly payments.  This translates into lower interest rates and a higher credit line, and may mean you don’t have to give as much in security deposit or down payment.  Most people don’t go past 800, so any score above 750 is generally considered to be pretty good.

Your FICO credit score is calculated by weighing different types of credit data, such as payment history, amounts owed, length of credit history, number of recently opened accounts, and types of credit used.  Therefore, some of the easiest ways to improve your credit score is to pay your bills on time (even if just the minimum), lower the ratio of your outstanding debit to your credit limits, try to keep an older credit card active by using it to make a purchase every so often (even if the credit card doesn’t provide much rewards), and not open new credit cards that you don’t need.

Unfortunately, your credit report does not come with the score for free.  The best way to get your credit score is through www.myfico.com.  For $16, it will give you your credit score, tell you whether it is good or bad, and simulate how it may change.  And you should try to purchase your score from all three credit bureaus (Experian, Equifax, and TransUnion) at least once, since each bureau calculates the score slightly different.

The Right Way to Get Your Credit Report

If you haven’t reviewed a copy of your credit report, perhaps now is the time.  The Fair Credit Reporting Act guarantees each person access to a free credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion) every twelve months.  Make sure, however, that you get your credit history from AnnualCreditReport.com, because it is the only source authorized by the Federal Trade Commission to provide free credit reports to consumers.  The FTC has received numerous complaints from consumers who ordered their credit reports through FreeCreditReport.com, which is run by Experian and automatically signs consumers up with a trial membership.  In response, the new 2009 credit card legislation requires that credit reporting agencies clearly state that their services are not actually free.

Whether you decide to order the three reports at once or spread them throughout the year so that you can monitor your credit report every four months is entirely up to you.  My suggestion would be to switch between the two, so that you can compare your credit reports and also monitor your credit score/history frequently.  Different credit bureaus calculate your credit score differently.  You also want to check all three reports to make sure you recognize all the accounts listed and that all the information is correct.  Go to the FTC’s website if you want to dispute credit errors or suspect identity theft.

But why are credit scores and history even important?  Check back with Money Under Your Futon and find out.

Take Advantage of Your Corporate Credit Card

When I first started working, my firm gave me a corporate credit card from Diners Club, to which I can charge business expenses, such as plane tickets, overtime meals, and taxi cabs.  Over the past the three years, however, my corporate credit card has been my primary credit card.  Here are the reasons why:

  • Two month grace period – For each billing cycle, I get a two month grace period to pay off the complete balance before the credit card starts charging me interest.  More times than not, expenses, especially those involving international travel, take more than a month to get reported to and approved by accounting, after which a check is cut to reimburse me.  The two-month grace period feature has helped me out on more than one occasion for such these reasons, but it also served as a safety net in case I ever find myself too cash-strapped to pay the full balance right away.
  • Rewards program – I have to pay a $75 annual fee to gain access to the rewards catalog, but it has been completely worth it.  After three years ($225 in annual fees), I was able to exchange my points for $425 in Amazon credits, $100 in statement credits, and a $20 gift card to California Pizza Kitchen.  This is more than a 200% return.
  • Customer service – The Diners Club has great customer service, in that I have never once spoken to a machine.  Further, when a hotel in Spain charged me for a night’s stay after claiming that I did not email to cancel my reservation, I was able to dispute the charge with Diners Club and they credited me the amount I was charged.  Considering that it was an international purchase, where euros had to be converted to dollars on my statement and there was a foreign exchange fee, I was grateful that Diners Club made the process so painless.
  • Credit report – Lastly, the Diners Club does not show up on my credit report.  So while I don’t get rewarded for paying my balance on time and in full, should I ever lose the credit card, I never have to worry about someone charging it and ruining my credit score.

If you are lucky enough to get a corporate credit card, whether Diners Club or the American Express Corporate Card, do a little investigating.  The best source of information will probably be your colleagues, so ask them about their experiences and see if using the corporate credit card as your primary credit card will be worth it for you as well.