This story is featured in my new book, Soldier of Finance, now available at all major book retailers
A previous intern of mine, Kevin, was oblivious to what his credit score was. His parents had always told him to not open a credit card in fear that he would get in massive credit card debt and ruin his future.
Unfortunately, his parents were wrong.
I had him find out what his credit score was and he was unpleasantly surprised. This is his story of finding out his credit score and what he did to improve it. Enter Kevin….
As a Junior and Senior in college I was always told that applying for a credit card could be my first step in the wrong direction.
I was given the warnings that I am sure many parents have given, and many young adults have received, the major outcome being that I would spend money without conceptualizing the possible consequences of not being able to pay it off.
Without actually handing money over for goods I would purchase, I would fall victim to losing the concept of having to work for items that I was receiving, as well as the curse of living above my means which many Americans fall victim to on a daily basis.
My response was always the same,
“How would I know until I was able to try for myself?”
When I was finally able to try to get a credit card for myself, my initial attempts were laughable to the banks I talked to. I had to walk into the banks and tell them what is probably the typical story for anyone who is in their final years of college, or have just graduated very recently from college. It went like this,
“I am un-employed, have no credit history, and have a couple thousand dollars in college debts that I will have to start paying on in the next year or two.”
Lets face it; this is not exactly the most appealing story when you are trying to convince someone to give you a line of credit!
Two banks denied me, but one of the bankers let me in on some info which has helped me raise my credit score over 100 points in the past five months which I think everyone should be aware of. The gist of his story was that I should stop trying to apply for credit cards and getting denied, his reasoning was when you apply they do a hard credit check which in turn will actually lower my credit score even lower!
Get It Secured
He 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.
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.