8 Years Ago – I Didn’t Exist – I Was a Credit Ghost
In 2010, as a newly minted married couple with two incomes, my beautiful bride and I made our first major purchase together: a new car! Let’s forget that a couple of 22 year olds don’t need to ever buy a NEW car. But we did need a car; our car’s catalytic converter was shot and it cost more to replace than the car was worth. (Thanks to Saturn for shutting down their manufacturing in 2009). We had picked out the car we wanted, and the dealership was offering 0.9% APR financing to “well qualified” buyers. No problem. Except when the salesperson came back to inform us that we could not get approved as joint buyers. We couldn’t believe it! We paid our loans and bills and had jobs. But, because I never owned a credit card, I showed up as a “credit ghost”. That means that the 3 major credit bureaus did not have any information on me at all. When you searched my name and social security number, nothing came up. My credit score was WORSE than 0; it didn’t exist, I had no credit history.
I was a spooky credit ghost
We were shocked. I was embarrassed. I had never heard of a credit ghost. My wife couldn’t believe that I never owned a credit card. I couldn’t believe that she had a half dozen retail credit cards. We asked if they could remove me from the loan and retry the approval. After a much shorter wait than before, the salesman was back with the good news – my wife was a “well qualified” buyer. We were able to drive off with a new car financed at 0.9%. But how would we get a house in the future if I basically had an imaginary credit score? How was a credit ghost supposed to survive in a world of credit cards and loans?
We had to do SOMETHING
When we got home that night, I tried to find out how I might be able to get a credit card and start increasing my credit score. The internet didn’t really reveal any usable information. There were some cards that required me to deposit my own money, and then charged a fee for the privilege of using my own money (called secured credit cards). There was no way I was going to pay a fee to use my own money. The only other thing I found was to be a co-signer on a line of credit. My wife and I had been sharing a bank account since our junior year of college, so it was easy to have my wife (the well qualified buyer that she was) open a credit card with a $5,500 limit. Once that was taken care of, we went in to the bank together and I was added on as an authorized user.
~ 10 Months as an Authorized User
Nothing changed for me during the first 10 months of being an authorized user. I was sent a credit card for the account, but I left it at home in my nightstand. In the 8 years I’ve been on that account, I’m not sure I’ve ever swiped that card (or any of the subsequent cards that are sent every few years). We made sure that a few charges were made on the account every month, and we always paid the balance off in full. If you are currently a credit ghost, being able to sign up as an authorized user is the best way to build your credit from nothing.
Using your spouse, a parent, or a really good friend you can quickly and cheaply build enough credit to apply for your own credit line. You need to be sure that the person you are signing on to is paying their credit card bill on time, otherwise you could dig yourself a hole that will make it more difficult to achieve a decent credit score. On the flip side, the person adding you as an authorized user needs to trust you to not rack up a credit card bill that can’t be paid off. If you don’t actually need to use the card anyway, why not just cut it up when you get it, or tuck it away somewhere. After all, you are only interested in building the credit history. So long as your credit card partner is using their card as they normally do, and paying it off as they normally do, your credit score will improve.
Opening my First Credit Card – Enter Costco
About 10 months after I was added to my wife’s credit card as an authorized user, I thought it was finally time to try to open my own credit card. I needed more credit accounts to increase my score. I wanted to open a card with someone I trusted that I had built SOME kind of rapport. Since I had been a member of Costco for a year, and because it was time to renew our membership, I would apply for the Costco American Express. It was a cash back card that carried a $50 annual fee and they waived the Costco membership fee if you carried the credit card.
After I sent in my paperwork, I waited anxiously for a week before the good news arrived – I was approved! Once I had that beautiful piece of plastic in my hand, I started using it slowly. At first, I only used the card for gas. Eventually I graduated to groceries. I was always certain that I wasn’t buying anything outside of our normal expenses. The bill was always paid in full at the end of each month. I just plugged away on that credit card. Using it for the staples I was going to buy anyway with a debit card, and paying the bill off at the end of the month. Eventually my wife and I were ready to buy a house. Home Loan rates were at historic lows and we didn’t want to keep waiting to see if they dropped further and risk them rising again. We worked with a realtor and found the house we wanted. The part we had been planning for was up next.
Applying for The Mortgage
Gathering all of the paperwork took ages. We weren’t quite as organized then as we are today. We worked with a mortgage broker to secure our loan and pre-qualification so we could put an offer on the house we wanted. Once all of our information was in, we waited. And waited and waited and waited… I was beginning to worry that the time I spent as a credit ghost would hurt our chances of getting this home. But eventually, after a couple of long weeks, we had secured a loan for the house we wanted! The rate was 3.75% on a 30 year loan. Rates would continue to fall to ~3.25%, but we were happy with the rate we earned. During the loan meeting we found (hidden in the hundreds of pages of documents) our credit scores. Just 18 months after I didn’t exist in the world of credit, I had managed to get my credit score to a healthy 712! My wife was crushing it with a 750 score.
All of those retail credit cards had served a much greater purpose than just getting my wife 10% off that particular purchase – it allowed her to buy a car, earn a 750 credit score, and enabled me to piggy back off her score to raise my own.
I’m No Longer a Credit Ghost, Now What?
A few things have changed in the last 6 years. We paid off my wife’s car. (It did nothing to help my credit score since I wasn’t on the loan). We financed a used car a few years ago. And we took out a Home Equity Loan to finance a home remodel (we talked about that in this post). Lastly, I opened a Best Buy credit card. I still have my Costco card, now serviced by Citi instead of American Express. I exclusively use that card for all of my purchases, and (all but a few months) pay off the balance at the end of the month. The amount of money I have charged to that card in the 7 years I have owned it… they have made a pretty penny off of us. I do feel a sense of loyalty to that card (and Costco too actually) because they were the first to accept me and my credit ghost-ness.
My Fico Score Today
We’re better off in a lot of ways today (check our most recent net worth post to see). Currently, my credit score is 827. A lot of websites now provide your credit score for free, and update it every month (this is from Citi). We are fortunate that we have been able to continually pay our bills and almost always keep our monthly balances at $0. The only factors that aren’t “excellent” about my credit score are the length of time my accounts have been open, and the number of accounts I have opened. Aim for a dozen accounts and about 10 years of credit history to be considered “excellent” on those factors. I’m not in any rush to open more accounts to boost my score higher. And there’s nothing I can do about the time except wait, and keep making loan payments on time.
As it turns out, nearly 20% of adults are credit ghosts (CFPB 2015). Either for the same reason that I was a credit ghost – never had any credit accounts. Or because too much time had lapsed since the last time they utilized a credit account. That could happen if you pay off all your debts and decide to go with cash for a several years. It typically happens to older people.
What Can You Do?
If you are a credit ghost without credit history, here are the 3 steps that you can follow to raise your credit score to “good” in less than 2 years:
Sign on as an authorized user to your spouse/parent/sibling/great friend’s credit card, and then don’t use it. Do this for ~6 months.
If this is not an option, there are now several secured credit cards that do not have annual fees that you can sign up for. I have never used one, so I won’t recommend one, but there are several sites that should provide a good option.
After 6 months, open a credit card, ideally with your bank or credit union. Congratulations, you aren’t a credit ghost anymore! Only make purchases that are part of your normal monthly expenses (groceries, gas, electricity bill, etc.). Pay off your card IN FULL at the end of each month. Do not carry a balance and incur interest. Do this for ~1 year.
After 1 year, you should be able to check your score using many free methods. Possibly your credit card, Mint.com, CreditKarma.com, to name a few. Now bask in the glory of your “good” credit score, but don’t stop there. Continue to make payments on time, never carry a balance, build credit history, and make payments ON TIME. Give it another 5-6 years and your score will cross over into the “excellent” territory.
Now You Know
That’s it! The 3 steps I followed to earn a 712 credit score 18 short months after being a credit ghost. I’m confident that if you follow the same 3 rules and are diligent about making monthly payments and not carrying a balance (as best as you can), you’ll be in excellent standing with the credit bureaus and able to better use credit as a tool to achieve your financial goals.
Good credit is just one of the tools that we will use on our road to a $1,000,000 retirement nest egg. I’m sure that in 4,337 I will have enough credit history to be considered “excellent”. By that time, I may just have enough money to not give a damn anyway.