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My Personal Credit Experience
When was younger my mother opened a credit card in her name and my name. Well this was great because it got my started off in the perfect direction. Well little did i realize that concept would bite me in the butt later on.. By the time i turned 18 i had a 740 credit score bought my first car with no cosigner, no problems, no questions asked. So lets see 18 years old, credit cards, brand new car and i also moved out and was paying rent.Well time went by and soon enough i was becoming broke and couldn't afford for even food anymore! So i started doing what you should NEVER do. Thats letting your least needed credit cards, and or payments go and this became easier and easier to do. Well little did i know i was tricking myself to think i didn't need to pay for things i could just let them go, and i still have whatever it is i bought. Soon enough i had no more credit cards, and my car got repo'd. So lesson to be learned from this is, never lift up if you have to much open credit pending and ALWAYS pay what you owe.
Get It Secured
She also told me that no major bank was going to accept my credit application anyway, but there was another way. This other option was to sign up for what is called a “secured” card, which is offered through Capital One. Now as you will probably decipher yourself when I tell you the agreement of a secured card is that it is horribly one-sided in favor of the lender, but I assure you it is a small price to pay for what it has done for me in the past five months.
The secured card is like a credit card, except you have to give them all the money in advance of what would be your credit limit on a normal credit card. At first this process confused me, I thought that I would give them my initial check for the limit, then as I spent the money, it would deduct from this initial down payment. The actual process is they hold this deposit as your limit, then do not deduct from it as you spend on your secured card, rather all expenses on the card are treated like a regular credit card.
There is also a $34 dollar a year fee to have a secured card, so you can begin to see how the deal is definitely in their favor for giving you the chance. After you have made the deposit, it is then a real credit card, all of the expenditures are treated as if it where not a secured card in the eyes of the credit unions therefore establishing credit in your name.
This is the route I had to take, and I suspect there are many people out there who are also in a similar situation to what I was in. Even though you have to put all the money up front, as well as pay an annual fee for giving Capital One all of the money you would theoretically spend, it is still very much worth it from a longer-term perspective.
First Credit Score Check: Ouch!
I checked my credit score in March of 2011 right before I decided I would like to try and get a credit card and had a credit score of 621. I set up a Capital One card with a credit limit of $1,100. This credit limit should be a function of what you have, and also what you plan on using the credit card for. According to many bankers and friends I talked to, you should try to run a 75% utilization rate on your credit card to maximize your potential to raise your credit score.
So if you only spend around $300 a month, you should only give Capital One a $500 dollar down payment so that you are utilizing your credit rather than having a $1,000 dollar limit and only spending $300. My expenditures were approximately $700 dollars a month so the $1,000 dollar limit fit my needs.
Smart Spending
After I had gotten my secured card and started spending, I would make sure that I would only spend money I already had, or would receive before the next pay period. I ended up paying off my credit card roughly four times a month ensuring I never carried a balance from one month to the next. I would never let my card exceed $800, and I would never pay it off if the card balance were under $300 unless the pay period was coming to an end.
I would spend every penny on my credit card from the smallest expenses such as a drink from the gas station, to major purchases such as airline tickets or hotel rooms. I repeated this process for five months to establish a credit history always paying on time, and always making purchases on my credit card.
Second Credit Score Check: Yes!
In August of 2011 I had to purchase a car so that I could switch jobs, when I filled out the credit application to see if I qualified for the lower financing rates, my credit score came back as a 731.
This meant that in five months I raised my credit score from 621 to 731.
This is a very big deal because at 621 I would have been denied a loan for the car, or would have had an interest rate that exceeded 9% on the auto loan. Since I chose to get a credit card, in this case a secured card, I was able to take the car loan on my own, and qualify for their special 3.99% financing for the car.
The difference in the loan between the two different interest rates would be $750 over the life of the loan, far surpassing the $34 dollar annual fee, and the opportunity cost of Capital One holding my $1,100 for the five months they held it.
Message To The Parents
To all of the parents out there on the fence about letting their college kid apply for a credit card, or to all of the college students who have been denied a credit card, or are also on the fence of whether it is a good idea, I can tell you it worked for me in five months and will change my financial future for many years to come.
It is a foolproof way to receive a chance to raise your credit score when it is not possible through a regular bank credit card, and is a safe way to earn credit if you do not trust your kid or self with a credit card that is not collateralized with your money. The worst that can happen with your secured card is that you cannot pay your bill; Capital One closes out the account, and pays off your credit with the money you have already given them causing your credit score no further demise because you defaulted on a payment.
The secured card worked perfectly for me and I have now been accepted for a credit card at a major bank. I closed my secured card because of the annual fee associated with it, but I would recommend it to anyone who would like to raise his or her credit score.
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