Should I, as a young person, get a credit card with "bad" conditions?

Question

I'm a twenty year old in Russia, not enrolled in education, working full-time officially for a software development company. I'm earning a taxed steady income that can be considered decent, yet when I applied for a credit card at my current bank it was not approved due to lack of credit history.

Would it be a good decision for someone outside the United States to build up his credit history to apply for credit cards with "worse" terms than average, such as larger interest, shorter or no grace period, etc.?

Answer 1

There are several things that go into your credit history. I believe this applies to most credit systems, but I should warn you that most of my information is US-centric. There may be variations in other countries.

Some factors:

• on time payment of a recurring expense - things you pay for after you receive them, rent, utilities, or a cell phone contract may fit this category if they are not pre-paid
• on time payment of a secured debt - a mortgage or car payment
• on time payment of revolving debt - credit cards
• debt to income ratio
• utilization of credit - if your other factors show that you could have $50,000 of credit but only have $5,000 this is a negative to lenders because someone with more credit can survive a bump. To you though, it is probably an advantage because you're not using credit and just saving for things

You can build a credit history with a credit card, you can also do it with on-time payments on other things that are reported to the credit bureaus. A revolving line of credit is only one factor.

With less credit history your terms on a credit card or loan will not be as good because lenders just don't know your track record. You will have to accept that you might not get good terms, you should not however accept terrible terms.

If you get a credit card with less-than-great terms the easiest solution to build your credit and protect yourself is to use the credit card only as much as you can afford. For example if you spend $200 on groceries and commuting every month then put that on the card and only that and pay off the card in full every month. This makes it neutral to your budget. You are not spending any more than you would normally. By paying the card in full, every month you avoid the higher interest rates because you don't need to pay any interest.

Answer 2

Would it be a good decision for someone ... to build up his credit history to apply for credit cards with "worse" terms than average, such as larger interest, shorter or no grace period, etc.?

It depends on what terms you can get. In your position I would consider these terms a high priority:

1. No annual fee.
2. A normal length grace period, or at least one that is long enough such that you would never have to pay any interest.

Beyond that, if possible, I would narrow it down further by choosing one that has some amount of cash back. The higher the better. (In the US at least 1% should be possible.)

I wouldn't care so much about the credit limit or interest rate, because if the purpose of the card is strictly for credit building, then I recommend you barely use it each month, and always pay it off in full before you are charged interest. For example, maybe use it just for gas and at restaurants. Even if you start with just a $200 limit, if you follow this strategy you'll likely have thousands in credit within a couple of years.

If you can't find a card that meets the above requirements, then you may want to look into getting a secured credit card that does meet them rather than one with worse terms.

Update: In a comment below Mark has a great idea regarding a set-and-forget strategy for building credit. You could set up one of your smaller bills to be auto-paid by your credit card (such as a utility bill or your Netflix subscription). Then you could also setup your credit card to auto pay in full every month from your bank account so you never will have a late payment, and you'll also never accrue any interest. Then you can lock your CC away and never use it for anything else, which will remove the temptation of accruing debt. If you like this strategy, I would recommend choosing a card that has these features:

• Ability to alert you (via text or email) for every charge that is made on the card.
• Ability to auto pay the balance in full every month.

This way you will instantly know if your CC is ever compromised and if it is you can turn off the auto-pay in full feature. You wouldn't want to automatically pay the bill for something that you didn't purchase, especially if it could risk putting your checking account negative.

Answer 3

I'm the contrarian on the site. I believe that credit cards are the spawn of the devil and should be avoided at all costs. I have lived with and without them, and can confidently say life is much more relaxed without them. Instead of getting a credit card, build up your cash reserves.

If you want to get rich, do rich people stuff. Rich people don't borrow money. If they hit a rough patch they eat beans and rice, or serve hotdogs at their kids wedding reception. ** Edit ** Even Guy Kawasaki (guru of building wealth on other people's money [aka debt]) only recommends buying stuff that will provide cash flow on debt, never consumer goods or depreciating assets.

Take the old fashioned route of "cash or you can't afford it". Consumers spend differently when they are handing over cash. They bargain hunt more, defer optional purchases, and invest more money.

Before too long you will find you have no need of debt instruments. Even a mortgage is easy to get if you have sufficient cash reserves, but you may not even need that with careful investing.

People will talk about the importance of a credit rating. I have been without debt long enough that I have no credit rating. The habits that got me to this point have also put me in a position where I can pay cash for anything I need - car and house included.

Potential employers (software and services indistry) who have checked my credit rating have held its absence to be a positive. (Disclaimer - one of those potential employers was the Lampo Group, which promotes debt free living) I look after the resources I have, so I never need debt anymore.

Edit

If I had known when I was twenty what I know now:

1. I would have never taken a credit card

2. I would never have taken a car loan

3. I would have invested more of my money in low turnover aggressive growth mutual funds

4. I would have paid attention to my expenses, using a zero based budget

Following that path, I would have reached my current financial situation some 25 years earlier.

Edit 2

Rather than post all of the responses to the defenses of credit cards in comments, I'll add them to the answer, already researched and composed better than I have the time to do on my own. I recommend reading the much more details and entertaining originals.

Edit 3 Abridged From https://www.daveramsey.com/blog/credit-card-qa-with-dave .

Is there ever a good time to have a credit card? NO. NEVER. When you play with snakes, you get bitten.

"I pay mine off every month."

CardTrak, who gets their information from the credit card companies, reports 60% of people don't pay your credit cards off every month. Cambridge Consumer Credit Index found that 47% of balance holders only make the minimum payment. A study by Dunn and Bradstreet showed that the credit card user spends 12 to 18% more when using credit instead of cash. After McDonald's began taking credit cards, they found that people spent $5 to $7 more per sale.

"They give me airline miles."

Consumer Reports says 75% of the airline miles are never redeemed.

"I need it for travel and to buy stuff online."

Dave Ramsey: "Between media appearances and live events, I guarantee I travel more than most of you, and I do it all with a debit card. I don't have a credit card. I buy things online, stay in hotels and rent cars all the time using my debit card. The only thing the debit card won't do is get you into debt."

"I have to build my credit."

Lenders are telling you to get debt so you can get more debt. Your debt is how they earn money.

"What about buying a house?"

Since you aren't "building your credit" you will need to find a mortgage company that does actual underwriting. You can qualify for a conventional 15-year fixed-rate loan.

The big question is, What do millionaires do? They don't get rich with free hats, brownie points, or air miles. What do broke people do? They use credit cards.

From https://www.daveramsey.com/blog/excuses-to-keep-credit-cards, 6 lies that people believe about credit cards:

1. “They’re so easy to use compared to cash.”

True. Unfortunately, that also means it’s easier to overspend.

A study by Carnegie Mellon, Stanford and MIT even showed a difference in brain activity when we use credit cards instead of cash.

2. “They’re great in case of an emergency.”

Instead of using a credit card, build up an emergency fund of 3–6 months of living expenses and rely on that the next time a true emergency happens. Then it just becomes a minor inconvenience.

Personal aside: when I came home from vacation to find my house flooded, while I was still getting out of the debt hole, I never had to touch my emergency fund BECAUSE I had the cash on hand to cover the expense of repairs. Typically there is a drawn out process between the bank and insurance company, which the bank waived, cutting a 4 week process to 1 day.

3. “They give us rewards, points, miles, or cash back!”

No one ever got rich off a rewards program.

4. “They’re easy to pay off every month.”

Maybe. But life happens and people fall into traps. CardTrak, reports 60% of people don't pay their credit cards off every month. Credit Index found that 47% of balance holders only make the minimum payment.

5. “They’re necessary to build a credit score.”

So why would you want a high credit score? Because it allows you to take on even more debt in the future?

The truth is, you can qualify for a mortgage and rent an apartment with zero credit (which will happen eventually if you stop borrowing altogether). And for everything else—even cars—pay cash. No credit score needed.

6. “They make our dreams reality.”

Credit cards give us opportunities we would never have otherwise. It’s all about instant gratification, right?

Answer 4

My suggestion, if available in your country (I'm in the USA), is to start with something called a Secured Credit Card. This is more or less guaranteed for someone without any credit history and usually has favorable terms. The catch is the secured part - it requires up front escrow of the full credit limit. For example, for a credit limit of $1000 on the card, you give the provider $1000 and they keep it in escrow. If you ever cancel the card you get the money back. I used this when I was starting to build my credit after a long period of living abroad, and it helped get me off the ground.

Answer 5

Short answer: Yes.

If you haven't yet established a good credit history, you're not going to get the best possible terms on a credit card. Suck it up and get a card with mediocre terms. When I was young, this meant a very small credit limit and a higher interest rate. Then keep your spending within the credit limit, and pay it off every month so the interest rate is irrelevant.

It's just like, when you're fresh out of school, you can't expect to get a job paying $100,000 a year for you to do nothing but share your opinions. Your first job is more likely to be flipping burgers or shuffling papers. You have to work your way up.

Answer 6

I had my parents co-sign to get my first credit card. I had the same insufficient credit history status at your age.

Until I had my first car loan, and paid it off I wasn't taken seriously by creditors.

After that and a few years of work history, I had mailboxes full of credit card offers.