Credit card catch-22

You need a credit card to have credit history and need credit history to have credit card; how’s that for a vicious circle.

Several years ago when I move to US, I neither had credit history, nor any clue about what it meant. It wasn’t a problem until I wanted a credit card and found out that in the United States, most of lending decisions are based on the credit score. “Fair enough”, I said to myself and tried to find out how to get a score to qualify. It turned out to be a catch-22 situation: to have a score, I needed credit, and credit score is used to determine whether I could get a card (or any other loan.)

ce_FICO-Score-chartDigging deeper, I also found the factors that affected the FICO score (as they call it). Now I needed a way around it to get a credit card which was both a need a want at that time; I found couple of options as follows:

  • Getting a secured credit card: I am not a fan of this option because your money is stuck, and the credit limit is equal to the amount you have as security. For example, if I want a credit of say $5000, I would have to give bank $5000 as a security deposit. This is not a bad idea to start building credit if you have spare money laying around and you don’t plan to use it in next couple of months.
  • Have a co-signer: if you’re new to a country, I don’t think you’ll have much luck finding a co-signer.
  • Being an authorized user with someone else’s card membership: same consideration applies as previous one
  • Getting a credit builder loan: You take a loan showing evidence that, based on your income, you’re capable of paying it back with interest, and in turn they report your credit to the credit bureaus. This sounded ridiculous to me since it meant paying interest for no reason; building credit score shouldn’t be that expensive.
  • Convince a financial institution that you’re financially responsible, and have a job: easier said than done, but after talking to couple of banks, and credit unions I finally found one that was willing to issue me a credit card based on my job (provided I sent them my latest paycheck and salary history; I wouldn’t take all the credit, a friend of mine recommended me to try this.) I got a card with relatively low limit, and only a small caveat – there was no reward associated with the card. At that point, I wasn’t worried about rewards anyways, my main focus was building credit and this option superseded all others.spiderman_power_responsibility

I’ve heard that based on your pending pattern and paying bills on time – being responsible in short, often they increase your credit limit; that never happened to me and when I tried calling them after couple of months, they said they can but it would hit my credit score again. I didn’t go for that, rather applied for another credit card, which was approved! Since then, I’ve been approved for several other credit cards as the credit built over the years.

I like credit cards because they give you free money to spend and don’t expect it back for at least a month. Can it get better than that?! Add to that the convenience and fraud protection [and several other features, rewards etc.] But as they say, “with great power, comes great responsibility.” Since my first credit card over 10 years ago, I’ve always paid my bills in full every month; paying huge credit card interest is not worth it, and all the rewards only make sense if you don’t carry a balance.

 

2 thoughts on “Credit card catch-22

  1. Pingback: The Truth about Home Security System | How far does your money go?

  2. Pingback: Why I pay everything with credit card, and you should too | How far does your money go?

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