May 19 2010

If You Have No Credit, You Have No Credit Score

Posted by Simon Zhen in Credit, Credit Cards
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For the many young adults, especially college students, how to use a credit card may be common knowledge but how credit works is quite the mystery. That doesn’t come as a shock since most teens start receiving credit card offers as soon as they become 18 (although that is no longer the case).

On the other hand, there are some young adults who are more cautious when it comes to consumer debt and avoid credit cards until they find out later that credit cards play a significant role in building good credit history and a good score.

Reader and 22-year-old college graduate Cora asked:

“I don’t have credit card yet, but I do have a debit card. Do I still have a credit score (especially when I charge credit instead of debit for certain purchases)?”

Almost Everyone Has a Credit Report
Firstly, if you have a Social Security number, you have a credit report. The moment a Social Security number is issued in your name, you have your own credit report – and you could be just a few weeks old. It’s not surprising when we hear crooks committing identity fraud on children and those children grow up many years later to discover they have a tarnished credit history.

If you have no credit history, you have nothing on your credit report. A blank credit report offers no information to input into a credit score calculation – therefore, you have no credit score. You cannot be classified as having poor, fair, good, or excellent credit.

With no credit history, lenders have no way to gauge your likelihood to repay your debts and they are reluctant to extend a line of credit to you. Like most young adults including myself, your first opportunity to establish credit would probably be with a student loan co-signed by a parent.

Thanks to the Credit CARD Act of 2009, building good credit is now more of a hassle since credit cards can no longer be issued to those under 21 years of age unless they have a cosigner or proof of ability to repay.

If you have no credit history and find it difficult to obtain a regular credit card (and you’d like to remain financially independent), sign up for a secured credit card. A secured credit card uses money you deposit in an account as collateral – the amount you deposit is your credit limit.

It would be wise to visit www.annualcreditreport.com to retrieve a free credit report. In fact you might as well perform a financial checkup while you’re at it.

Credit-less “Credit” Debit Card Purchases
As for those “credit” purchases made with your debit card, there is no direct relationship to your personal credit report. Since the debit card is linked to your checking account, which is not considered a line of credit, nothing is recorded on your report.

Banks ask you to select the “credit” option because when you do so, they can charge the merchant (where you swiped your debit card) a credit processing fee which is around 2-3% of the purchase amount as opposed to the ten cents it costs them to conduct a “debit” transaction.

(Photo credit: Dplanet::)