Credit - A Way to Discourage Those Who Handled Their Money Well

One of my close friends was recently denied a credit card from his own bank. This friend is 26, finishing up his phD in electrical engineering, has a job with a space research institution, and has been living on his own for the last several years. This friend has been able, thus far in life, to pay all his bills (schooling, car, rent, etc.) through a combination of money management, scholarships, and a little help from the Bank of Mom & Dad. So, until now, he's never needed to take out a loan or put purchases on a card, because he's been able to manage his own finances so well as an adult.

His bank denied his credit card application on the basis that he has no credit history. So let's talk a little more about that.

Theoretically, if you pay rent, write checks, and hold down a job, you potentially have a credit history. Rental companies are allowed to put in information about your payment history into your report, as are banks who issue you checks or check cards. Even your employers can list that they have had you on their payroll for such-and-such amount of time. But none of these companies are required to do so. So even if you've always paid rent on time, paid your bills to various utility companies, and have had a steady line of employment, you may not have a lick of information in your credit report. To make things worse, get this: if you get a 'lesser' card - for instance, a gas card or a credit card from someone other than MasterCard or Visa - you still may not have anything in your credit report!

So...to sum up...you can't get a credit card because you have no credit. You have no credit, because you can't get a credit card.

My friend is attempting to get a card for the simple reason that he needs to put some of his work-related travel expenses on a card so that he can go to his meetings, and still be able to pay his bills while he waits for the school to reimburse him. It's funny how the credit system is essentially punishing him for being smart with his money.

So now what? Well, unsurprisingly, I had the exact same problem a few years ago, when I moved out after finishing college and was renting a condo with a good friend. I was in a similar situation as my friend above; due to my own situation, I was able to pay for schooling and my car without having to take out a loan. So now, while I was attempting to set up our utilities for our new apartment, I found I was unable to get our internet account completed because they only accepted credit card payments (no check or debit cards were accepted). So I cheerfully made my way to my bank (with whom I had, in my opinion, a very sizable account balance) and applied for a basic, low maximum card.

I was, of course, denied a card for the lack of a credit history.

About that time, I was receiving other pre-approved offers in the mail, like most people. I went ahead an accepted one that was sent by one of my honor societies from college - the interest rate wasn't great, but as I was only using the card for a $30 payment each month, that wasn't a problem. Eventually, after developing a good payment history from that card, it isn't a problem to transfer your balance to a newer, better card.

In any case - what a hassle for those of us who managed our money properly in the first place.