A Cautionary Tale: What To Do When You Literally Have No Credit

As I had stated last week, my Cousin just got a job in Seattle, so I will be heading out there over Labor Day.

Well my Cousin is just about to graduate College, and now that he is entering the real world, he asked for some help setting up his finances before his new job started, so I obliged.

Now I’m sure he is not the only one, but for some reason, at 22 years old, he has never had a  Bank Account or Credit Card in his own name. Both are technically under his Parents’ name.

While I have been telling him to sign up for a Credit Card for the last few years, he has put off that free advice until now!

While the majority of travel hackers obviously think of Credit Cards as primarily a great way to earn boat loads of miles, surprisingly they do serve other functions!

The most obvious is that Credit Cards can help you build your Credit History.

The longer your Credit History, the better picture Credit Lenders (like Chase) have to calculate the amount of risk you present to them.

If you have a 20 year Credit History of always paying on time, then there is a highly probable chance that you will continue that pattern.

If you have a 2 year Credit History of paying when you feel like it, there is a highly probable chance that you will continue that pattern.

Having Credit is not only just for getting loans!

It is also becoming standard practice at many Companies to now require credit checks of all prospective employees. If you can’t manage your own finances, how can a company expect you to manage theirs?

In addition, I am currently looking for a new apartment and every single leasing company that I visited required a Credit check.

In my Cousin’s case, not only is he going to need an apartment but he is also going to need a car since his job is outside of Seattle in Bellevue.

Hopefully, the apartment situation will be fine without a Credit Report! However unless he makes a huge down payment on a car, he most likely won’t be able to get financed for a loan unless his Parents co-sign (which I’m sure is every Parents dream)!

Therefore for any Parents out there, I strongly encourage you to sit down and have “the talk” with your high school age children about Credit and sign them up for a Student Credit Card.

Not only will you help them build their Credit, but once they graduate College, they will have enough of a Credit history to sign up for the big boy travel cards!

John Doe

So before my Cousin signed up for a Credit Card, I directed him towards the Beginners Guide.

He also had quite a few frequent flyer accounts that were in disarray, so I told him to sign up for AwardWallet.

After he did that, before signing up for a Credit Card, I told him to head over to Credit Karma and Credit Sesame.

While it is obviously a good idea to check your Credit Score every couple of months, in my Cousin’s case, I wanted to check to see if he even had any type of Credit Report.

Some times when Children are added onto their Parents’ Credit Card account, if their Social Security Number is added to the Card, then the Parents can inadvertently help the Child build their Credit from a young age. If the Credit Card is only in the Child’s name and is not attached to their Social Security Number, then normally it won’t helping in building the Child’s Credit.

After he created a log-in and entered his personal information on Credit Karma, we got this error message. At first, I thought maybe he entered his Social Security Number wrong or mistyped his address, so I told him to try Credit Sesame.

However we got a similar message.

The Perfect Storm

At first I was dumbfounded because I helped my younger Brother complete this exact same process this past Summer (prior to College). Although he didn’t have any Credit, they could still at least verify that he existed.

But then when I started to think about it, the situation my Cousin was in was really The Perfect Storm.

For most College students, even if they don’t have a Credit Card, they typically have some form of federal student loans (subsidized or non-subsidized). These loans are included on your Credit Report, so even without having a Credit Card, College students with loans will build their Credit

However in my Cousin’s case, he didn’t have any private or federal student loans.

Another thing that most people don’t think about is Bank Accounts.

While they don’t directly impact your Credit Score, when you open a Bank Account, they ask for your SSN. Therefore when you go to open a Credit Card, when they pull your Credit Report, although there might not be any Credit History, they can at least verify that you exist and can tie you down to a specific physical address.  However again my Cousin’s case, his bank account was registered under his Parents’ name which is why Credit Karma and Credit Sesame couldn’t he pull his report.

If having Credit wasn’t such a serious situation, it would almost be comical how under the radar my Cousin is currently flying!

For government conspiracy theorists, this would be their dream. While most people have a huge backlog of data about their purchasing habits, payment history, previous addresses, etc that can be data mined and then used to build consumer profiles, my Cousin literally has none of this. When he was added onto his Parents’ Bank Accounts and Credit Cards, the Bank does not typically verify the identity of additional Card holders.

Starting From Scratch

While I originally thought that my Cousin only needed help signing up for a Credit Card, I quickly realized that we were going to literally going to have to start from scratch and sign him up for his own Bank Account.

As I practice what I preach, I sent him over to CharlesSchwab.com and told him to register for a free online checking account. Not only will this help him avoid any unnecessary ATM and account management fees, but when he has to travel overseas for his job, he won’t be charged any foreign transaction fees.

After we set up that, I sent him over to my Student Credit Cards post and told him he had his choice between Capital One Visa or Discover. While typically I would have suggested the Chase Freedom, in his case since he literally had zero Credit History, I decided to not even risk it since the Chase Freedom isn’t officially considered a “Student Card”.

He opted for Capital One.

The ironic thing is that when he signed up for the Capital One Credit Card, where it asked for his annual income, I told him to reduce his income because his starting salary is so high that it might actually flag the system and cause more problems.

However because Credit Card companies only base your Credit Limit solely on your Credit History, even though he will be making close to $100,000 a year, he will have the same $1,000 Credit Limit as my 18 year Freshman Brother.

Hopefully my Cousin will pay all of his bills on time, and in a year or so of monitoring his credit on Credit Karma and Credit Sesame, he can apply for a big boy travel card with a credit limit of more than $1,000.

The situation my Cousin has found himself in is really unfortunate and could have been completely avoided had he had his own Bank Account and Credit Card when he started College.

Even if he pays all his Credit Card bills on time for the next 2-3 years, in the event he wants to buy a house in the near future, bank lenders will look at his Credit Report with a skeptical eye since even when he is 25, his Credit History will only be 3 years long. Whereas someone like myself who signed up for a  Credit Card at age 18, will have a 7 year Credit History when I turn 25.

Don’t Make The Same Mistake

The point of this post is to encourage any Students and the Parents of college aged students to not sit on the sideline and wait to apply for a Credit Card and Bank Account until the finals days of College.

Even if you have young children, you should really think about setting them up with a free checking account at your local Credit Union or Bank.

It is never to early to start learning how to manage money because unfortunately it isn’t a skill that is taught in school!

-Parag