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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.?

Ivan T.
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  • When I was young and just starting out I took out a very small loan with an outrageous interest rate and paid it back over the life of the loan to get started with establishing credit. That one time "bad" terms loan is all it took to move ahead with credit. – Dave Jan 31 '18 at 16:12
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    @Dave Inidividual experiences often vary, but it is often not the best idea to 'pay interest now' just to 'save an undefined amount of interest later'. ie: paying 'outrageous interest on a loan' may not outweigh a small change in your risk assessment through credit rating for a future loan which slightly lowers your future rate. There are often many things you can do to get a credit score which don't include paying a penny of interest (see more on this site for details). – Grade 'Eh' Bacon Jan 31 '18 at 17:25
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    the utterly overwhelming factor is that you must *pay it off entirely every month*. There's no other piece of information that should be in your mind. – Fattie Jan 31 '18 at 20:41
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    If you have deposit accounts with a bank that also offers credit cards, they may be willing to offer you a card with less terrible terms than other in light of your existing relationship and balances with them. – Todd Wilcox Jan 31 '18 at 21:33
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    After my bankruptcy, I started rebuilding my credit with a Target store card. Purchased my item, then went promptly to customer service to pay it off. – SeanC Jan 31 '18 at 21:39
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    It might be beneficial to distinguish between bad terms and dangerous terms, the latter being only bad in certain conditions. And we can distinguish those conditions even further in conditions under your control (i.e a matter of self-discipline) and those that aren't (sudden financial emergencies). – MSalters Jan 31 '18 at 23:34
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    "In Russia" and "out of the United States", while both factual statements in your case, are not the only two options yet you present them as such. I'm not really seeing the relevance of the United States to your question; can you elaborate on that? – Lightness Races in Orbit Feb 01 '18 at 15:08
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    No matter how good the terms, Never, Ever get any credit card unless you will always be able to completely pay it off every month. If you do this, it will not matter that the interest is 10000% anyway, correct? – MickeyfAgain_BeforeExitOfSO Feb 01 '18 at 16:01
  • OP: I wonder why you accepted answer suggesting less-than-great card, is you can get secured credit card with great terms, as suggested in @bimarymax answer. There are no banks in Russia providing secured credit cards for people with no credit history but positive balance in the bank? – Peter M. - stands for Monica Feb 02 '18 at 14:18
  • @Ivan - I am having a tough time finding common terms for credit cards in Russia. For example, in the US, cards cannot charge interest if you pay your balance in full, and continue to use the card. Which is why, we who pay in full often don't even know the rate the card might charge. We also have a variety of 'rewards', bonuses for card use, such as cash back or airline miles. Can you edit your question with the "bad term" examples? How high interest? Etc. Do you have the ability to get a secure card? i.e. you make a bank deposit as credit, and that's the card limit? – JTP - Apologise to Monica Feb 11 '18 at 16:00

6 Answers6

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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.

Freiheit
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    In plenty of places rent doesn't count towards credit ratings (frequently because there's never any credit; rent is paid up-front monthly), and utility bills vary (some places you can either pay up-front or based on actual usage). – gsnedders Jan 31 '18 at 21:06
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    AFAIK, in many other countries a credit history only contains delinquencies. This is the case where privacy laws forbid sharing personal data by default, and only allow it for cause. In particular, the EU GDPR will affect credit histories in all EU member states. – MSalters Jan 31 '18 at 23:37
  • yes..... pay off, pay off, pay off! To use credit cards to your benefit - with any terms - you need to be paying in full almost all the time so that you don't carry a balance and build up interest. If you can be good at that, then you can even get into the games of cards with "rewards", other than your credit score. – Mike M Feb 01 '18 at 05:22
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    "on time payment of a recurring expense" - the most likely example of this for the OP is a mobile phone contract. – Martin Bonner supports Monica Feb 01 '18 at 12:09
  • I tried to read up on credit score in Russia but didn't have enough time on break to sift through credit ratings on Russia as a country versus for consumers in that country. I hope a native can chime in and review or refine the answer to suit OP – Freiheit Feb 01 '18 at 17:38
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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.

TTT
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  • "at least 1%" cashback may well be hard, depending where OP is. (e.g., in the UK, there's a single card available with over 1% and that's only on spend over £10k per year, and those at 1% are limited, either 1% only at a certain store or only 1% with an annual fee or 1% only on spend over £5k per year). – gsnedders Jan 31 '18 at 21:05
  • @gsnedders - Thank you. I edited to mention that particular sentence is US specific. – TTT Jan 31 '18 at 22:06
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    For a minimally-used card, I'd use it exclusively for set-and-forget recurring payments: things like utilities. It's quite hard to over-use a card if it never leaves your file box. – Mark Jan 31 '18 at 23:59
  • @Mark - fantastic idea. I've incorporated it into my answer. – TTT Feb 02 '18 at 17:51
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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?

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pojo-guy
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    Rich people borrow a tons upon tons of money, it is just they call it "leverage", not "debt". Managing debts and risk vs assets is a vital part of making money - and you would have been much better off had you not set the one side of that equation to zero... But otherwise +1. There is no "reason" to get a credit card if you can manage to do without one - they are best as a liquid "emergency" capacity. But debt in general is the grease that keeps the wheel of economy turning. – Stian Feb 01 '18 at 08:41
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    You're extremely fortunate, or you live somewhere with an extremely low cost of living, if you truly managed to get a car and a house with cash. The majority of people, even living frugally, live paycheck-to-paycheck. Where I live, even the cheapest houses cost as much as 8-10 years on minimum wage. A credit card that you treat like cash (i.e.: paid off in full every month) is, for many people, the only way to build up a credit rating enough to get a mortgage without crippling themselves financially. – Herr Pink Feb 01 '18 at 13:11
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    @HerrPink I didn't purchase my current home with cash - which is precisely why I am such a proponent of no-debt living now. The only thing I did right was purchase a repossessed home from the bank at well below its normal value, in an area with low cost/high standard of living. After that I made a bunch of stupid mistakes that ballooned my debt, before I listened to reason. It took me 7 years to climb out of the debt hole once I decided I was done with it, and then another 7 to get to where I am today. – pojo-guy Feb 01 '18 at 13:25
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    @pojo-guy I'm confused; what did you mean by "I can pay cash for anything I need - car and house included" if not that you purchased your car and house without credit? Your own unfortunate debt issues aside, I think it's terrible advice to tell people to never build a credit rating simply because that excludes the vast majority of the developed world from ever owning a home. – Herr Pink Feb 01 '18 at 14:24
  • @StianYttervik "Leverage" implies using debt to purchase something of higher value than the cash in the loan. Guy Kawasaki, Donald Trump, and others epitomize this approach, but they also tend to go through cycles of build and crash. On the other hand, you have Steve Jobs, Bill Gates, Dave Ramsey, and Dan Cathy build their wealth and keep it until they give it away. I know which group i'd rather be in – pojo-guy Feb 01 '18 at 14:29
  • @HerrPink I can do that now, after leaning my lessons the hard way. I could have then had I learned the lessons when I was 20 instead of closer to 50. – pojo-guy Feb 01 '18 at 14:30
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    I have always had a credit card and I have always paid it off in full when the monthly bill arrives. Just because you have a credit card doesn't mean you have to be in debt. – Michael Kay Feb 01 '18 at 22:39
  • What @MichaelKay said. Having a credit card is not the same as being in debt. I have multiple credit cards. I've never paid a dime of interest or held a balance on any of them. Having credit cards is a very different thing from carrying balances on them. Also, as far as "doing like the rich people do," I'm 99.999% sure that Bill Gates doesn't carry around the money he spends in cash. At least in the U.S., wealthy people pretty much use plastic exclusively nowadays. They just don't carry a balance on their cards. – reirab Feb 02 '18 at 00:37
  • By definition, any time you make a purchase with a credit card, you have taken on debt. Even if you pay it off monthly before any interest accrues. But there is no need to take on that debt, debit cards enjoy the same convenience and protections that credit cards do, and never allow spending of money that isn't really there. – pojo-guy Feb 02 '18 at 01:34
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    @reirab: In the attainment of "cash or you can't afford it", the consideration is not bills vs plastic, but assets vs credit, so debit cards and checks certainly qualify. There certainly are disadvantages to using debit cards as daily-use plastic, but judicious use of multiple accounts can eliminate the actual risks. – Ben Voigt Feb 02 '18 at 05:50
  • @BenVoigt Do you really think the 'rich people' his answer said to behave like use debit cards or checks as their primary day-to-day payment method? Credit cards or charge cards are pretty much ubiquitous in that arena, at least in the U.S. As far as assets vs. credit, a charge made to a credit or charge card for which you have the money to pay off the charge sitting in your bank account (and the intent to do so) is, for all practical purposes, the former and not the latter. The only significant difference is that you'll earn interest on the funds in your bank account for a few extra weeks. – reirab Feb 02 '18 at 06:26
  • @reirab: Yes, and I use credit cards every month as well, although less for the float and more for rewards. There definitely are holes in his argument against credit cards. I was just explaining why your "everyone uses plastic" comment wasn't a valid counter-proof. – Ben Voigt Feb 02 '18 at 07:12
  • @BenVoigt That was a counter to "If you want to get rich, do rich people stuff." "Rich people" (at least in the U.S.) mostly use credit or charge cards. And, yeah, my CC usage is mostly for the points, too (a few hundred thousand extra airline miles never hurts!) The extra interest doesn't hurt either, but it's more of a secondary concern. – reirab Feb 02 '18 at 07:24
  • @reirab JB Hunt and Sam Walton would disagree with you if they were still alive. – pojo-guy Feb 02 '18 at 08:07
  • Ordering goods online internationally sometimes requires a credit card as the only possible payment method. However, a prepaid credit card will usually do fine. – rackandboneman Feb 02 '18 at 10:07
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    When I used to travel regularly in the US I used to find that places like hotels insisted on credit cards and wouldn't accept debit cards. I never understood why. In Europe both are equally acceptable. – Michael Kay Feb 02 '18 at 10:54
  • In US, both are accepted now. Walmart took the card companies to court over different handling of debit and credit cards, and started the process to open their own card company to compete with the big ones, and the card industry changed. – pojo-guy Feb 02 '18 at 12:48
  • You are most welcome to present your views, but post-edits, you've simply lifted/quoted 2 full Dave Ramsey posts. Which is frowned upon. The answer is now a potential plagiarism delete. I'd invite you to leave the links to the original articles as a resource, but edit your answer down to simple summary of the two, not a wholesale copy. – JTP - Apologise to Monica Feb 02 '18 at 13:44
  • @JoeTaxpayer Abridged as suggested. – pojo-guy Feb 02 '18 at 15:14
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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.

binarymax
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  • Sounds like a debit card where you have that cash in your bank account. How would they differ? – Criggie Feb 01 '18 at 03:13
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    The difference is the bank treats it as a credit card and reports it as such to credit reference agencies so it does build your credit history. You still have to pay the balance you incurred each month. Also after a certain period, usually one or two years you can usually convert directly to a normal unsecured credit card. The secured deposit protects the bank against you defaulting on your payments in the mean time. – RobV Feb 01 '18 at 10:03
  • Just for reference...cause i'm not sure if they still offer it...but i have a secured card through Applied Bank. They take a while to acknowledge a payment, but they charge 0% interest. Others i looked at wanted to charge me 18-30%. – cHao Feb 01 '18 at 16:35
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    @Criggie There are a lot of differences between credit and debit, beyond just that credit cards allow you to spend money you don't have. For instance, the fraud protections for credit cards are stronger. – Acccumulation Feb 01 '18 at 22:09
  • @acccumulation the protections are legislated stronger, but most banks offer the same level of protection on debit cards as credit cards. It costs them too much to administer different levels of protection. – pojo-guy Feb 02 '18 at 23:54
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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.

Jay
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  • a new grad working for fb amazon etcetera will earn a lot more than 100K$ – Neuromancer Jan 31 '18 at 20:26
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    that's not, really, true @Neuromancer. by all means pricing for programmers - in general - is insanely high at the moment - through the roof. but funnily enough, the main thing that is valued is practical experience. "degrees" for programming are becoming more of a joke every month. a tiny number of basketball players make 10s of millions right out of the gate: it would be incorrect to state "new basketball players in the NBA make tens of millions". it;s just not correct to state that "a new grad will make" .. 100k. – Fattie Jan 31 '18 at 20:38
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    just BTW amazon is famously very badly paying. their salaries are a joke compared to high-flying programming gigs. (it's one reason their game-engine division is a joke and going nowhere). So that's a bad example. FBook also offers pretty mediocre salaries (relative to other programming salaries.) – Fattie Jan 31 '18 at 20:39
  • I have no idea what Amazon and Facebook pay. Never worked there, don't think I've ever known someone who worked there. But if they're really paying new grads $100k, I have 38 years experience, maybe I should apply there. I just found something says the average salary of a programmer in the US is $65k. As that presumably includes both new grads and people with decades of experience, compared to salaries I've seen, that sound plausible. Note that $100k in California is not at all the same as $100k in Michigan. – Jay Jan 31 '18 at 21:47
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    @Jay Amazon/FB pay what they do largely become Seattle/Bay Area wages are that inflated, rather than being that high compared with other programming jobs in the area, AFAIK. – gsnedders Jan 31 '18 at 22:45
  • According to this website, http://money.cnn.com/calculator/pf/cost-of-living/, a salary of $100,000 in San Francisco has the same buying power as $53,000 in Detroit. Whew, I knew cost of living was higher in California, but I didn't realize it was THAT much higher. – Jay Feb 01 '18 at 15:58
  • Just to irritate the millenials, when I was in my final year of undergraduate study they distributed flyers with a single application for perhaps 30 or 50 credit cards on them (back then there were department store, oil company, grocery store etc. cards). I applied for about 10 or so and was granted every one despite having zero credit history. Small limits to start though. – Spehro Pefhany Feb 01 '18 at 20:55
  • @Jay It's definitely that much higher. Land prices are insane in Seattle and the Bay Area. The taxes are also insane in the Bay Area. That tool estimates a comparable salary to $100k where I live would be $202k in SF. I'd say that's on the conservative side, especially if you actually live in SF rather than the suburbs. As far as Seattle is concerned, a house that would go for $200k where I live goes for easily $500k+ even in the suburbs of Seattle, let alone Seattle proper. – reirab Feb 02 '18 at 00:53
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    @reirab Yeah, I saw some article a few months ago about people who have found ways to live cheaply. One was about a man in New York City who bought a condo that was just one tiny room and a bathroom, the main room was kitchen, dining, living room and bedroom all in like 7 feet wide by maybe 20 feet long. And they said that once he paid off the $500,000 mortgage it would cost him ONLY $1,000 a month in condo fees. And I thought, wow. I live in a 2100 square foot house that I bought about 8 years ago for $80,000. – Jay Feb 02 '18 at 14:49
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    Though I've occasionally thought that if you got a job in some high-cost area where the salaries are even somewhat commensurate, manage to save some of that inflated salary, then retire to someplace cheap, you could have a very comfortable retirement. – Jay Feb 02 '18 at 14:51
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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.

cybernard
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