Dear Credit Card Adviser,
As an 18-year-old, I can't get a credit card until I'm 21 under the new Credit CARD Act. Are there options for me to build my credit score now? Can I get a secured card without a co-signer?
-- Mari
Dear Mari,
The new Credit CARD Act, short for the Credit Card Accountability, Responsibility and Disclosure Act of 2009, does make it harder to build credit when you're between the ages of 18 and 21. It requires an underage applicant to have an "independent means of repaying any obligations" or the signature of a co-signer who is at least 21 years old and has the ability to repay any debt.
You may be able to get a secured card under 21, but the requirements of the CARD Act still apply.
At Bank of America, for example, you might be able to qualify for one without a co-signer. Spokeswoman Betty Riess wrote in an e-mail: "We do offer a secured card and the same rules apply to young adults under 21 that we have on the unsecured card. If the adult applicant meets the ability-to-pay criteria, they will not require a co-signer. If the applicant does not meet that criteria, we would require a co-signer."
How does an issuer determine if you can pay your bills? In January, the Federal Reserve Board issued a rule with more specific guidelines on this topic. Issuers must review the consumer's income or assets and current debt obligations using "information" from the consumer or the person's credit report. The issuer must consider the ratio of debt obligations to assets, the debt-to-income ratio or the income the consumer would have after paying the debts. Issuers can estimate income or assets using "statistically sound" models.
For an underage consumer, the written application must include "information" that indicates ability to make the minimum monthly payments.
Secured cards have a unique feature to them that may help a young person meet the ability-to-pay requirement. The applicant has to deposit money into a collateral account, which the bank or credit union holds in case of default. Neither the law nor final rule from the Federal Reserve mentions whether a deposit for a secured card would satisfy the ability-to-pay requirement, though. The Federal Reserve Board couldn't provide me with a definitive answer.
My feeling is the deposit would count toward the ability-to-pay requirement, but it sounds like you still need to prove you can make the monthly required payments. You can't pay each bill with a portion of the deposit.
I'd check with the card issuer on how to satisfy the ability-to-pay condition.
As an alternative, you can build credit by becoming an authorized user on a parent's existing account. As long as the creditor reports authorized-user information to the credit bureaus, the shared account will appear on your credit report. There are pros and cons to this strategy, though. Late payments on the account will affect your personal score and your parent's. A high balance-to-limit ratio could also hurt both scores.
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