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Question from Globe reader Anne: My 22-year-old son banks with PC Financial. He has had a job for three years at the same company. He has more than $20,000 in savings. He did not get a credit card earlier because he wasn’t sure he could be responsible with it. He now wants to get one so he can make online purchases but is getting declined. Where does a responsible millennial get a credit card?
Ms. Simmons works with young people to help them navigate the new economic climate with personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
The answer: Congrats to your son. Having a job, no debt and $20,000 by age 22 is no small feat these days. The problem your son is facing is that of a person with no credit history.
Lenders want to lend to people with a proven track record of responsible credit use so they use your credit score as a metric to see if they should approve your credit application. Without credit history, you’re an unknown quantity. You could be great with credit, or terrible. There’s no way for lenders to know and therefore you may get denied.
If you’re in this situation, you’re going to have to find a way to get a credit card, use it and pay it off within the grace period each month to start building your credit history. It’s a bit of a chicken-or-egg situation: You need a credit card to have good credit, but you can’t get a credit card without good credit.
Before we deep-dive into how to hack the no-credit-need-credit situation, I need to yell something from the rooftops. Use any type of credit card that you get responsibly. You need to ensure that you pay it off in full each month. If you can’t afford to do that, you risk taking on debt that you can’t pay back. This could lead to missed minimum payments and maxed out cards which will kill your credit score – the very thing you’re trying to build.
If you can’t afford to pay off your credit card each month, don’t get one. The best thing for you to do is to get a secured credit card which we talk about below.
Ok, now that that’s out of my system, let’s continue. First, you should try to apply for a standard unsecured general-purpose credit card at a major bank. This is a credit card that you can use anywhere and has an interest rate that probably ranges between 15-18 per cent, or even higher. If you get denied, don’t worry, there are some workarounds.
My favourite workaround is a secured credit card. A secured credit card works just like a regular credit card except that you have to give the bank money up front. The amount of money you put down will dictate the spending limit. You can get a secured card without credit history because the banks aren’t taking any risk.
When you use your secured card, your borrowing activity gets reported to the credit bureau. This is a wonderful and safe way to start building up your credit history. However, the fees can sometimes be a little expensive, so be sure to shop around.
Another workaround is to get a co-borrower and apply for a joint credit card. If you have a family member or friend that you trust and who has good credit, that could improve your chances of getting a standard unsecured general-purpose credit card. If you are co-borrowers, the credit activity, good or bad, is reported to the credit bureau for both people.
Keep in mind, everyone is equally responsible for any outstanding balances on the card so ensure you both understand the risks. If one of you decides to book a trip around the world without paying for it, the other person is on the hook for that trip. Not fun for the person stuck at home with a mega credit card bill or declining credit score.
Lastly, you can apply for a credit card from an institution that doesn’t require a credit score or who makes it relatively easy to qualify. Typically, these are department store credit cards or financial institutions that specialize in offering high-risk credit cards. If it’s a department store credit card, ensure that the card allows you to make purchases somewhere else besides just that store.
The risk to you with these types of cards is that you are potentially facing a very high interest rate on your first credit card, perhaps higher than 19.99 per cent – yikes! But, if it’s your only option to get a credit account, you can use this type of card with caution until you qualify for an unsecured general-purpose credit card.
Just ensure that you are very careful. Do not overspend and be sure to make all of your minimum payments within the grace period. Of course, this advice goes for any credit card, but it’s especially important with significantly high-interest rate cards.
All is not lost. You can break the chicken-or-egg cycle of needing credit history to get a credit card. Getting your first credit card is a big deal. It’s your first step toward achieving and maintaining a good credit score that will be used for future car loans, mortgages, rental applications and more.
With great borrowing power comes great responsibility. Wield your borrowing power for good.