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Ask HN: Is credit necessary and how/where do you bank?

11 points by speek ↗ HN
I'm an incoming college freshman around the Cambridge, MA area and I've never had a credit card (never felt the need for one), but I've been getting a lot of advice from my peers and older friends to build up my credit as soon as I can. I do have a checking account as well as a savings account, thus far, with a small local bank and ING direct.

I'm a strict believer of don't buy crap you can't afford, so I was wondering if you guys/gals had any advice as to whether or not it will be worth it for a person like me to get a credit card and which national/regional banks would be worth banking at for small business/personal uses. Ideally, this bank would be internationally recognized (Swift code is a plus).

I may plan on taking out a loan eventually for some entrepreneurial purposes, but that's pretty much as deep as I'd like go into debt.

30 comments

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amberb617
Adolescents tend to make tons of mistakes when it comes to credit and taking out loans - I say that you should take it as it comes and only acquire one if it is of absolute need.

For now, just spend the little money you have. It makes life simpler and you don't have to worry about drowning in debt.

ericwaller
Good credit is important for everyone, but especially so for entrepreneurs.

I didn't realize this until my application for Web Payments Pro (on behalf of a newly formed corporation) was rejected by Paypal. Since the corporation had no credit yet, my credit had to be approved. As far as the credit reporting agencies were concerned, I didn't even exist.

If you plan on applying for business-related loans, you will definitely need good credit. And my understanding is that credit reporting lags by at least a year so get started building credit asap.

dangrover
This happened to me too. Still using Web Payments Standard.

I have no need for credit because I live well below my means and save up furiously.

So I got a Capital One card (my first credit card) and on the 1st of every month, I buy a single donut and pay it off in full 30 days later. I have no idea how this affects my credit rating, but it's tasty.

noodle
credit is necessary if you have plans to ever get anything with a loan, such as a car or house or, as you say, entrepreneurial purposes. people won't give you money if you don't have a history of being responsible enough to pay it off. its also good to have a line of credit for emergencies.

get a card, use it to buy small things on occasion, and pay it off in full every month.

edit: oh, also, i bank with bank of america and hsbc. hsbc for the high yield online savings and payment accounts, bank of america for the size, checking, and potential perks coming from establishing a long line of credit with a big bank

brk
In your case being that you don't want to overspend, this is more about convenience than credit, with the side benefit that you will build up a good credit score just by acting naturally.

I put almost all my charges on my credit card. From a $1.50 bottle of soda to a $100 tank of gas. The bill of course gets paid in full every month. Using the card means I don't have to carry a bunch of case, and I'm afforded some minor degree of security should my wallet get lost/stolen/misplaced as compared to cash. I also get to "keep" my money an extra 30 days to earn a trivial amount of interest.

It's good for you to be thinking about these things, but getting a credit card is not a life-altering decision, it's just a normal thing like getting a cell phone or a pair of shows. How you use the card, and put it to work for YOU, it what makes all the difference.

goofygrin
seconded.

When I was in college I worked full time but used credit cards the wrong way (and paid for it over the course of a few years).

Now just about everything goes onto a credit card (NOT a debit card) and it's paid off monthly.

Having a good credit opens a lot of doors and helps lower a lot of costs. Car insurance -- a huge factor in this is your credit score. Security clearances -- bad credit = harder to get security clearance.

Also if you ever need to self fund a start up, having good credit is important.

bct
Why not a debit card?
fortes
Debit cards don't build your credit score. I learned this the hard way when I started my first job and couldn't get a reasonable credit card, despite 5 years of using a debit card (and a healthy salary)
goofygrin
Like another poster stated, debit cards don't build credit, but there is one HUGE problem with debit cards.

If someone steals your card (or number) with a credit card and spends money with it, the credit card company is out the money.

If someone steals your card (or number) with a debit card and spends money with it, YOU are out the money until your bank is benevolent enough to return it.

I don't know about you, but I'd rather have someone steal Visa's money than my money.

srini
Another great benefit is that you get an itemized bill at the end of the month. It's a great way to track your spending.
naish
You should also choose a card that may benefit you in other ways. Collecting Airmiles or other loyalty program points, giving you cash back (yes, you can get paid to use your credit card). Don't worry about the monthly interest rate or initial offers because you'll always pay it off in full.

Developing a relationship with a bank through accounts and credit cards will also be of benefit should you look for more money in the form of loans or mortgages. Banks will always offer better terms to existing clients.

yummyfajitas
Do this. I didn't, it was a mistake. Landlords, employers and other such undesirables like to run credit checks. Being a "credit ghost" does not help you.
pbh101
Being a college senior, I just want to point out again that credit cards aren't intrinsically bad; rather, they're a tool that can be used effectively or abused.

I have a local Credit Union Visa and an Amazon CC, the latter of which I only use for Amazon because Chase Bank, the backer, is not nearly as friendly (higher fees, etc).

I pay for almost everything with CC because I like the itemization. That being said, I don't ever use them as 'credit' per se, to cover money I don't already have in the bank. To me, they're merely a useful convenience.

philipcristiano
You can get the card and cut it up right away so you never use it. By time the card expires you will have a decent credit limit, score, and interest rate and they will send you a new card. It would go faster if you used the card and payed it off right away but you can't use it if it is in the trash.
speek
Does anybody here use a Credit Union in Massachusetts?
brk
No, but I've heard good/decent things about DCU, https://www.dcu.org/index.html

They've been at 1 or 2 of the startups I've worked at over the years and seemed decent enough. But, not being a customer of them (or any CU for that matter), my opinion may not be worth the electrons it's carried on :)

altay
I used DCU for a car loan a few years ago. The rate was great -- 4% better than I could find anywhere else -- and they were really friendly.

My only complaint was that it was kind of a pain to get to a branch. (I think the closest one to Boston/Cambridge was in Waltham.)

cjh
I used the Industrial Credit Union for years (http://www.icu.org/). They offer a good rate of return on their savings plan, and you don't need to know someone in the credit union to sign up (I believe DCU has this restriction, or at least it did when I was looking for credit unions).

They are only located in Liberty Square (in the Finacial District in Boston), and they keep real banker's hours. I found both of those features desirable for a savings account, as it made me really have to put extra effort in when I needed to withdraw funds.

They do have on-line banking as well so they aren't totally isolated.

cconstantine
I was credit card free until my senior year in college. I payed everything with a debit card, payed my rent/utilities on time and didn't overdraft (ok, I did on occasion, but it wasn' a pattern). All that amounted to was that I had no negative mark on my credit report.

In my last semester of senior year I got a low limit credit card and used it for gas. Only gas, and I payed it off every month. About 6 months after I graduated I applied for a mortgage and fell into the highest credit group (excellent, which was 700+ at the time, I think).

This is the pattern I would recommend. Some people advocate having a long credit history as the best way to get good credit. I think the best way to do it is to have a low debt/income ratio and use credit responsibly.

You can try to game the system in the short term, but doing that almost always screws you in the long term because you're human, and humans make mistakes.

czstrong
I think it is a good idea to get a credit card and pay it off every month in full. This will build up your credit and will be good for you in many ways.

Just an example. I'm a college Junior and I've had a credit card for about a year now that gets paid off in full every month. Just last week I created my first cell phone contract in my own name. I didn't have to leave a deposit because my credit was good. However, a friend of mine, who has never had a credit card and I guess has no credit, had to leave a 500 dollar deposit to be held by ATT for a year.

tiomka
Do not be an ostrich, and follow the CASH ONLY rule. It doesn't make you any smarter, credit is something you should learn to control and take advantage of. Read/listen to this book: Philip Tirone - 7 Steps to a 720 Credit Score

Quick summary tips:

1. have 3 different sources of credit (amex, visa and mc)

2. use 30% of the limit (if your credit limit is 1000, and you put 900 on and pay off it every month, companies will see it as if you are using 90% of your credit, which will lower it)

3. Call every 4-6 months and ask to lower rate/increase limit

4. NEVER cancel a card, length of accounts is an average, and it will hurt your score. (If you don't want to use a card, make it pay your light bill automatically, and set up an monthly autopay)

5.

a. Quick tip to increase credit score: find someone you trust/that trusts you, ask them to put your name on their card. Don't get the actual card, if they have great credit, it will positively affect you.

b. If you cannot find anyone, go to Credit Union, open a savings account, put in 1000, take 3x300 loans out against the savings account, repay loans monthly, in 3 months your score will jump

* I am 24 and have an amex card with $25,000 limit, they send me promotions to get a cash advance for a fixed $3.99, great way to self fund ;-)

marvin
This is very interesting, but does having a high credit rating help you in any material way? Or to put it in other words, does it prevent problems down the road? What problems? How much money does your $25,000 credit limit save you each month, and how much time do you spend managing it?

For my own part, it feels like ass-kissing to prove to the powers that be that I am able to manage responsibilities and debt. It is not something I want to do unless it provides a considerable benefit.

RK
Mortgage.
tiomka
As far as making life easier, here is how it helps me: 1. Spending statements at year-end for tax purposes. 2. Miles for travel, I get a few trips per year 3. Lower mortgage/car rates due to good credit

Unfortunately, this is the only way to prove it (that I know of) - have credit and know how to manage it.

teuobk
For better or worse, the "piggybacking" loophole described in 5(a) has been (or soon will be) closed.
goofygrin
lets hope, because when I was in college I was an AU (authorized used) on my parents Amex and that haunted me for years (my parents have poor fiscal responsibility).
timcederman
Starwood Express American Express card, in my opinion, has the best bang for buck. Plus they've waived my yearly fee several times now.

If you are having trouble getting a card (like I did when I first moved to the US), Amazon Visa was an easy card to qualify for, and has decent benefits.

ken
Your credit score isn't just how well you pay off credit cards.

I have a "check card" (draws directly from my bank account, has a Visa/MC logo so I can use it anywhere). I assume this doesn't affect my credit score much, if at all -- it's rejected if I don't have the money in my account, so it's not really "credit" at all.

In fact, I've never had a real "credit card", but that didn't stop my bank from loaning me money for a car (they could see from my paychecks that I could afford it), or from me renting apartments (my current landlord did a credit check and said I have "excellent credit").

I think "you need a CC as soon as you go to college!" is mostly a scare story. Admittedly I'm not a big spender (e.g., I'm not buying a condo on credit), but I have yet to see any case where I was turned away from something due to my lack of a CC.

While it's not a silver bullet, I see how they can be really handy, so if you're responsible about paying it off, go for it.

CatDancer
Taking your questions in reverse order, I would first recommend not borrowing money to start or grow your business. Get investors instead. If your business should happen not to work out the first time, you walk away free and clear and can easily start another business. If you've borrowed money and your business fails, you still have to pay back the loan. This is an amazing gift: if you fail the first time, your net worth may be zero, but at least it won't be negative. [http://www.paulgraham.com/boss.html]

If you do decide to borrow money, you do not need to have built up your credit score. All you need to do is talk to a lender who has the intelligence to look at your actual situation. (As Dave Ramsey likes to put it, a credit score is lending for dummies). To get a mortgage for a house, for example, to qualify for the best rate, all you need is to have paid your rent for two years early or on time, to not to have bad debts, and to find a bank that does manual underwriting. You do not need to have borrowed a dollar before in your life.

A VISA debit card will give you exactly the same level of protection against theft and fraud as a credit card will. Look it up on their web site.

There are a few minor inconveniences to not having a credit score. For example, yes, I did have an insurance company initially want to charge me a higher insurance rate because I hadn't "established my credit". But all I had to do was call them up and explain that I didn't have a credit score because I didn't borrow money, and if they didn't give me a good rate I'd go to an insurance company who would look at my actual situation. And they gave me a reasonable rate. A five minute conversation. (If you want to be an entrepreneur, this kind of negotiation is trivial).

So if you don't need to "build your credit", why is everyone you know (and all the comments here on Hacker News) saying you should? Propaganda from the credit card industry is pervasive (their advertising budget, iirc, is second only to the auto industry). They have spent a great deal of money, time, and effort coming up with plausible sounding reasons why you should buy their product (credit), and ensuring that everyone has heard of them.

Your "credit score" is in fact a measure of how much profit you are making for the credit industry.

Maximizing your credit score isn't going to help you, making products or services that people want is what is going to make you successful. Don't spend your time optimizing the wrong thing.