Q. I have over $100,000 in student loans and have been denied for credit cards. I only plan to use the card to help build up my credit score and to pay for groceries between paychecks. What am I supposed to do if I keep being denied? I’ve been told lying about my income is what “everyone else does,” but I obviously don’t want to do that. Help!
A. Using a credit card can be an easy way to establish credit history when you’re in college or straight out of school. But using plastic is not the only way to build up credit — and some people might be better off avoiding it.
People with big student-loan bills may have a hard time being approved for cards because lenders may worry that their income is not high enough for them to cover their debt payments and other bills, says Beverly Harzog, a credit-card expert and author of “The Debt Escape Plan.”
“If you have $100,000 in student loans and are making $25,000 … that could make you look risky,” Harzog says. It is even tougher to be approved if you don’t have a history of other loans that you’re paying on time to show that you are a reliable borrower, she says. (Income is not factored into credit scores, but lenders do take pay into consideration when deciding whether to approve a borrower for credit cards or other loans.)
So if you’re in a similar situation, your best bet may be to focus on building up your credit history in other ways.
Payment history is the No. 1 factor that goes into determining a person’s credit score, accounting for 35 percent of the widely used FICO score. So paying your bills on time can go a long way to boosting your credit score and increasing the chances that you’ll be approved for a credit card or other loans in the future.
That includes paying your student-loan bill on time each month, because student-loan payments are reflected on your credit report in the same way that auto loans, mortgage payments and other loans get reported to the credit bureaus, says Heather Battison, vice president of TransUnion.
It also becomes important to pay other bills on time, such as your utility bills and phone bill. While those payments do not regularly show up on your credit report, late payments do get reported to the credit bureaus, which would leave a scar on your credit history, says Matthew Goldman, chief executive of Wallaby Financial, a software company that helps people maximize their credit-card rewards. “That’s going to count more negatively against you than having $50,000 in student-loan bills,” Goldman says.
Another option for building up payment history is to use a secured credit card, which is backed by money that consumers put into a savings account, Battison says. With a secured card, the lender will offer you a real credit card but the spending limit is equal to the amount of cash you provide, which will be held in a separate account
. So if you put up $500, your credit limit would be $500.
When you use the card, keep the balance low and pay the bill in full each month, Goldman says. “Put your Netflix on it, nothing big,” he says. “And pay it off.”
After more than a year of regular payments, the card issuer may upgrade you to a traditional credit card, Harzog says. If not, the steady payments might increase your chances of being approved for another loan.
Another way to build up your payment history is by being added as an authorized user for a credit card held by a spouse, parent or other relative who has a strong credit score, Harzog says. But first ask the card issuer if it reports authorized users to the credit bureaus, because not all card companies do. (And be aware that if the other card user falls behind on their payments, it could hurt you.)
Lastly, you can look into having someone with better credit co-sign your credit card application, which might improve your chances of being approved. But that person would also be on the hook — and could see their credit score take a hit — if you fall behind on payments, Harzog says.
Keep in mind that you might want to avoid credit cards for the time being if you’re having a hard time keeping up with your other bills, Harzog suggests. If you end up falling behind on the credit-card payments, it could leave your credit profile in worse shape than it was before you got the card, she says.
This is a feature in which we talk to experts about the personal-finance questions that stump readers.