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Not being able to get a credit card because of bad or non-existent credit is one situation that often comes up on my credit card consultations. This is especially frustrating for those that want to jump into credit card rewards. Being in this situation can be a result of past issues or simply not having any history, which is often the case with students and those that have moved to the US. In this video/post, I want to review how to build your credit the right way so you have the option of exploring points and miles in the future.
My early credit struggles
Getting started in the points and miles hobby is tough since it does require you to have a solid credit history. Since most of us start this process early in our adult life, it tends to be a time when we may not be as responsible or financially stable. This means that we can often end up on the wrong footing.
I had a rough start when I started. When I first entered active duty in the Air Force, I was sent to a three-month training class in Biloxi, Mississippi. The plan was to stay on-base while I attended training. However, the base housing was full, so I stayed off-base in a local hotel. I was told that I would either have to charge the hotel fees to my government credit card or to my personal card and seek reimbursement. Since I hadn’t received a government credit card, I placed all the charges on my personal card. I dreamed of all the cash back that I would earn on my Citi Dividend card!
Low credit limit + high travel expenses = credit disaster
Fast forward a few weeks and I found myself struggling to pay all the hotel charges. I didn’t have enough of a credit limit and I wasn’t making enough money that I could pay off the charges while I waited for a reimbursement. My credit score was affected too since I was maxing out my credit limit. This meant that my credit utilization was extremely high.
I ended up asking for assistance and moving back onto the base. It was a rough experience but a good reminder of how getting started can be tough.
Credit building scenarios
I want to focus on three specific scenarios that I’ve seen during my consultations where people are attempting to build their credit:
- Students getting started in credit cards
- Adults looking to rebuild their credit after financial problems
- New residents to the US that don’t have any credit history
1. Students getting started in credit cards:
If you’re a student and looking to get into credit card rewards, it can be tough. You’re at an age where you often don’t have much income and history that will allow you to qualify for premium travel cards.
You’ll often hear people recommend being an authorized user on someone else’s account, like a family member or friend. While this can help to boost your credit score, I don’t recommend it. You’re at the mercy of the primary cardholder. If they don’t pay their bills on time, then it reflects poorly on your credit history. Being an authorized user also doesn’t hold as much weight as developing your own credit. Plus, it can often show as an open account in your credit history, which might work against you when trying to get a new card in the future.
Recommended credit card for students: Journey Student Rewards from Capital One
For students, I recommend focusing on a student credit card. These cards oftentimes reward you with higher credit limits based on good payment and usage habits. One card that I recommend for students getting started is the Capital One Journey Student Rewards. The Capital One Journey card has no annual fee, offers 1.25% cash back when you pay your bill on-time, and increases your credit limit if you make your first five payments on-time. Also, the Capital One Journey will be useful if you’re traveling since it’s a Mastercard and doesn’t have any foreign transaction fees.
2. Adults looking to rebuild their credit after financial problems:
Life doesn’t always go as planned, and sometimes we find ourselves in situations of financial hardship. Even if you’re responsible with your finances, a family emergency or job loss can cause a major disruption. And financial measures like bankruptcies are extremely stressful, not just to your financial profile, but also to your emotional and physical well-being.
However, it’s possible to rebuild your credit. I recommend starting with a secured credit card. These credit cards require that you make a deposit on the card. As you use the card more and deposit additional money, you can unlock a higher credit limit. I know it may seem annoying to do so, but it’s the most effective way to prove your creditworthiness and improve your credit score and history.
Recommended credit card for those rebuilding their credit: Secured MasterCard® from Capital One
While there are several secured cards out there, I recommend the Capital One Secured Mastercard. It has no annual fee or foreign transaction fee and can be product changed in the future to other Capital One credit cards.
If you have a fair/average score, then you could instead apply for the Capital One QuicksilverOne CashRewards Credit Card that offers a 1.5% cash back reward on all purchases. Though keep in mind that you’ll be paying an annual fee of $39, so you need to be spending at least $2,600 per year in order to breakeven.
3. New residents to the US that don’t have any credit history:
This situation is near and dear to me. Since my partner, Fiona, is from the UK, she had to build her credit in the US as an adult. She was very deliberate about her approach. After a few years of following a plan, she is now able to get premium travel rewards cards. In fact, Fiona now has a higher credit score than me and doesn’t have any issues with getting approvals.
I also have a close friend who moved to the US almost ten years ago when she married her American husband. She recently decided to get into travel rewards and applied for the Chase Sapphire Preferred. Interestingly enough, when she checked her score on both Credit Karma and Credit Sesame, they showed two different pictures. Credit Sesame reported a 790 score, while Credit Karma said that they could not load her score and history. She ended up being denied based on insufficient credit history.
We later figured out the issue. Even though she had a credit card in her wallet, she was actually an authorized user on her husband’s account. And her credit usage wasn’t even reporting to all the credit bureaus. This means that she wasn’t building her credit in the process.
Recommended credit card for those new the to the US: Secured MasterCard® from Capital One
For this group, it’s similar to the previous one. I would start with a secured credit card like the Capital One Secured Mastercard. Again, the goal is to build your credit history and score so you can start applying for the cards that will give you additional rewards. Building your credit is important when trying to rent an apartment and get a loan or utility account. We take it for granted, but even things like auto loans or mobile phone plans require a credit check. So it’s important to do it correctly so you maximize opportunities and rates in the future.
Additional tips and considerations
Below are some tips to keep in mind for those you working to build your credit.
1. Be selective of your authorized user account:
If you decide to pursue an authorized user account, make sure you pick someone who is not only responsible when it comes to paying their bills, but also has a low utilization. That means that they are not using too much of their available credit. Though as I mentioned earlier, I think it’s better to build your own credit score and history, even if it’s with a secured credit card.
2. Avoid prepaid credit cards:
I’ve had people tell me during their consultation that they use prepaid credit cards purchased from a grocery or drug store. I don’t recommend this approach since it doesn’t contribute to your credit score or history. You’re much better off going with a secured credit card that can help build your score.
3. Consider less premium cards first:
There is a tendency to pursue premium cards before you’re ready or qualified. If you’re in the process of building your credit, you may want to pursue a less premium card first. This goes against the popular advice to apply for the hardest cards first. However, for this situation, the opposite makes more sense. For example, suppose your goal is to get the Chase Sapphire Preferred. It might be smarter to get the Chase Freedom or Freedom Unlimited first in order to build the relationship and show the issuer your creditworthiness. Plus, you can start earning points that you can combine and redeem later with your Sapphire card.
Of course, you’ll want to be cautious of rules like Chase’s 5/24. But taking it slow and going for easier cards can make it easier to get the more premium cards in the future.
4. Build a banking relationship:
I had a consultation with someone who tried to get the Chase Sapphire Preferred but was denied due to low income. However, he had a long-standing bank account with Chase. When he tried applying in-branch, he was approved. Don’t underestimate the power of building a long term relationship with the issue through other banking accounts.
5. Don’t rush the process:
The biggest tendency is to rush and apply for cards while a promotion is offered. For those of you trying to build your credit, take it slow! This is a marathon and not a sprint. There will always be another promotion or even a newer and shinier card in the future. I know it may seem like a missed opportunity. Though in the long run, you’re better off building your credit slowly and methodically rather than rushing.
Do you have any tips for those looking to build their credit? I know many of you have gone through the process, so please share so we can help others getting into credit card rewards and travel.
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