By Susan Tompor
Detroit Free Press
WWR Article Summary (tl;dr) John Ulzheimer, a credit expert who has worked for credit-scoring company FICO says it’s not uncommon for a lender to override an otherwise satisfactory credit score because of a limited credit history.
Detroit Free Press
The Uber Visa, launched last fall, targets on-the-go millennials with amazing rewards, such as 4 percent for eating out and 3 percent on airfare.
But the odd thing, as with many high-reward credit cards, is that getting approved for one of these Barclays Uber cards isn’t a slam dunk for some Generation Y consumers.
Many millennials might have college degrees and new jobs, but they’re held back from some of the more lucrative rewards cards in some cases because they were too cautious about handling credit in college. Yes, really.
One young teacher recently shared her credit card rejection letter with me. The reasons were listed:
–– Too few accounts with sufficient satisfactory performance.
–– Insufficient number of credit cards with your credit report.
–– Insufficient credit history on your credit report.
–– Low credit limits on installment trade(s) on your credit report.
The strange part? She had a 719 credit score, according to the rejection letter. Typically, 719 is a good score; an excellent score tends to be around 750 to 850.
Did someone make a mistake? How do you reject someone with a 719 credit score? Did we mention she has a job? And she’s not drowning in credit card debt? She remembers being late once with a utility bill.
“In my opinion, no credit is better than bad credit,” said Clare Naughton, 24, the teacher who lives in Greenville, Mich., and purposefully never applied for a credit card while in college.
“I’ve heard horror stories of getting a credit card too young,” she said. “I just didn’t want to have one until I was financially stable.”
Many in her generation would rather use debit cards to control spending.
“We believe that a lot of people think using a debit card does create a credit history. It does not,” said Barrett Burns, president and CEO of VantageScore Solutions, consumer credit-scoring model, created through a joint venture of the three major credit burueaus, Equifax, Experian, and TransUnion.
And no credit history or a limited credit history can create hurdles to getting a credit card.
Unfortunately, it’s not uncommon for a lender to override an otherwise satisfactory credit score because of a limited credit history, said John Ulzheimer, a credit expert who has worked for credit-scoring company FICO.
“Limited credit reports make lenders less confident that the score is a solidly valid representation of the applicant’s risk,” Ulzheimer said.
A credit score predicts risk by analyzing your history of borrowing money and paying your bills on time, as reflected in the credit reports compiled by the three national credit bureaus.
Credit scores take into account missed loan payments, high balances on credit cards, and personal bankruptcy.
Here’s how to approach applying for a credit card and what to know before you apply for a rich rewards card:
–– Understand that some cards aren’t in the cards for consumers who have a limited credit history.
“Higher-end credit cards like the Chase Sapphire Reserve and the American Express Platinum would likely be out of reach for folks of all ages who have thin credit files,” said Matt Schulz, senior industry analyst for CreditCards.com.
He notes that plenty of millennials have full credit files and some have gotten these cards.
“In fact, the Sapphire Reserve was such a hit with more upscale millennials that it almost single-handedly disproved the conventional wisdom that millennials don’t like credit cards,” he said.
Some millennials are deeply passionate about chasing rewards cards, so they’re likely to go after an Uber Visa, too.
And the rewards can be tempting: The Uber Visa perks even include up to $600 for mobile phone damage or theft when you pay your mobile phone bill with your card.
But again, if your credit history is not that long, and have avoided having a credit card into your mid-20s, you might have more trouble than you’d expect getting some cards.
–– Shop for credit cards for people with no credit.
The odds of getting approved for a credit card go up for those with limited-to-no experience with credit if they apply for cards marketed to that group.
Some options include the Capital One Platinum Card that targets those with a limited or no credit history and the OpenSky Secured Visa that has high odds of approval but a $35 annual fee, according to WalletHub.com.
A number of card issuers target those with newer credit reports or less-than-stellar credit scores, Ulzheimer said.
“Credit unions tend to be more flexible with their offers too, as are smaller local and regional banks,” Ulzheimer said.
Secured cards are an option, too, for someone who is just getting started, such as the Discover it Secured card.
If approved, the cardholder secures the line of credit with a deposit. A $200 line of credit requires a $200 deposit. It’s not a prepaid card or a debit card. If you pay your balance in full and close the account, you could receive the security deposit back at some point.
“It’s a good, low-risk way to get started with credit. It is, however, only meant to be a stepping stone,” Schulz said.
“Once you’ve done a good job with the card for six months to a year, upgrade to an unsecured card with better terms and more significant rewards,” he said.
–– Get a look at your credit report.
You want to review your credit report. Get a free copy at www.annualcreditreport.com to make sure the report is accurate. Or call 877-322-8228.
It’s important to understand what loans are listed on your report. You want to clear up any mistakes before you apply for credit. Make sure no one stole your information to open a car loan or credit card in your name.
–– Clean up your financial act.
There are steps that you can take to boost your credit score before you apply for a credit card, car loan or mortgage.
You’d want to have established a history of paying all your bills on time. A late payment may lower one’s credit score by dozens of points, according to the Consumer Federation of America.
Make sure to use only a small portion of the credit available on a credit card. In general, the higher the percentage of a credit line that is used, the lower one’s credit scores. You might want to aim for borrowing only 25 percent of the available line of credit.
It can help your score if you pay down credit card debt rather than just shifting it to another credit card or to a home equity loan.
You can take a 12-question quiz online at www.CreditScoreQuiz.org to get a better handle on how to improve your score. Such tips can help if you’re applying for a credit card, a car loan, a mortgage, insurance in many states, cellphone service or a lease.
Having a bad credit score means you’re likely to pay a higher rate on a credit card or a car loan. On a typical $20,000 auto loan from a bank, for example, a borrower with a low score would likely be charged at least $5,000 more in interest than a borrower with a high score.
After opening that first credit card, it’s essential to pay on time and not borrow anywhere close to the limit to build a good credit score.
ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press.