The right credit card can help you work towards good financial health.
Millennials are often criticized for being unprepared to manage money, despite being dealt a tough hand. With sky-high student loan debts and eye-watering house prices, getting a strong start with personal finances is more important than ever.
When you’re younger, it’s unlikely you’ll have much credit history — which is what lenders normally use to evaluate credit card applications. Our guide looks at what you can do about it and what your options are.
Should I get a credit card?
This depends on your personal circumstances. First of all, if you’re under 21, you can obtain a credit card on your own only if you have an independent source of income — typically, if you’re employed or receiving a student loan. If that isn’t the case, you’ll need a cosigner.
Secondly, if you’ve never had a bank account, consider starting there. By managing a checking account and debit card, you’ll build skills for responsible credit card use. Many credit card providers will also require you to have a bank account.
If you have sufficient income and some financial experience under your belt, you could be ready for a credit card. There are many benefits to having one, including flexibility in paying for purchases and getting an early start in building your credit score.
What are my options?
This may be the first time you’re trying to borrow money in any form. Your credit report could be sparse, meaning lenders will consider you a higher-risk borrower. They don’t know whether you’ll pay your debts on time.
If you are approved for a credit card, you’ll probably receive a low credit limit and a relatively high interest rate. If you use the card correctly, it’s no big deal: As long as you pay your balance in full every month, you won’t be charged any interest. But if you habitually carry a balance, a credit card can quickly become a very expensive way of borrowing money.
Consider these options if you’re starting out with credit
Look into these credit options and pick one that fits your personal and financial circumstances.
Student credit card.
If you’re enrolled in college, you may have an easier time getting started with credit. That’s because there are cards geared specifically toward college students that typically have no annual fees and student-specific perks, such as extra rewards for good grades.
Secured credit card.
A secured card requires an upfront security deposit. Because of this, a secured-card provider is typically more willing to accept a consumer with shakier credit.
Consider this type of card if a student card is out of reach or if you have subpar credit. It can help you build credit as you make on-time payments. Some providers will let you graduate to an unsecured card if you use your card responsibly.
Credit cards for young adults
Now’s the time to build great credit habits
If you have no credit card debt, give yourself a pat on the back. According to the Consumer Financial Protection Bureau’s most recent Consumer Credit Card Market report, the average card balance is over $4,800 among consumers with at least one credit card. And while that’s a lot, you’ll find people who are in even more serious debt — tens of thousands of dollars, or possibly worse.
To avoid that fate, it’s crucial to build responsible credit habits now. Your credit card may have a low credit limit, but see that as a good thing: This will keep you from getting into too much debt right away.
Follow these two strategies for responsible card use:
- Pay off your balance in full every month. While it’s tempting to pay just the minimum, this is a poor habit to start and could lead to fast-accumulating interest.
- Always keep your credit utilization under 30%. If you’re consistently maxing out your credit limit, fix the bad habit now. Several years down the line, you don’t want to max out cards with $10,000 credit limits. That’s a very deep hole to dig yourself out of.
How can I find a competitive credit card?
Comparing financial products can be difficult, especially when your options are somewhat limited. But with some research, you could find something that works for you.
Step 1: Make friends with your credit score
Your credit score is incredibly important. If you take care of it and grow it responsibly, it can open many doors for you — including giving you access to the best credit products and lowest interest rates.
Step 2: Think about what you need, but also about what you can get
You may be tempted to look for the best credit cards on the market, those with the best rewards perhaps. That may not be the best idea — you may waste loads of time and probably won’t get them anyway.
Instead, think about why you need a credit card — for example, to take advantage of an interest grace period, improve your credit score, etc. — and prioritize the features that will give you what you need. Also, give heavier consideration to cards that don’t demand an amazing credit history.
Step 3: Compare cards
There are various factors that can help you pick the right card. Here are a few of the major ones:
- Annual fee. You can find excellent student and secured cards for no annual fee.
- Rewards. Rewards are standard in student cards from major providers. Many products offer 1% rewards on all purchases, as well as bonus rewards for certain categories. Few secured cards offer cash back, points or miles, as their main purpose is to help you build credit.
- Other benefits. Secured cards tend not to offer many features. But you’ll often find student-specific perks with student credit cards. The Deserve® Edu Card, for example, offers an Amazon Prime Student credit. And the Discover it® Chrome for Students offers a $20 statement credit each year you earn a 3.0 GPA or higher, for up to the next five years.
- Fees. You might find little extras here and there that could tip the scales. For example, Discover will waive your first late fee for its student and secured cards, which could be helpful as you’re easing into credit. And Capital One waives foreign transaction fees, which could be perfect if you’ll study abroad.
Step 4: Get pre-qualified
Once you think you’ve made the right choice, wait a bit before applying. When you submit an application, the card provider will initiate a hard pull on your credit, which typically lowers your credit score slightly.
Instead, check if the provider offers pre-qualification. Essentially, you can see which of the provider’s cards you’re eligible for. The provider will run a soft pull on your credit — which doesn’t affect your credit score — and recommend cards that fit your profile. You may even be eligible for a better card than you thought.
Step 5: Apply
Have your personal and financial details ready and always provide accurate information. You can usually apply online within 10 to 15 minutes.
Here’s some information you’ll typically need for your card application:
- Full name.
- Date of birth and Social Security number.
- Residential address.
- Email address and phone number.
- Employment status and total annual income.
You may receive an immediate decision on your application. If the provider needs to review your application further, it may take several business days to hear back.
If you’re approved, look for your card in the mail within seven to 10 days.
Step 6: Activate your card and set up automatic payments
Once you receive your card, activate it according to your provider’s instructions. Then, strongly consider setting up automatic payments that clear your entire balance each month. This will help you protect your credit score and stay out of debt.
Pros and cons of getting a credit card as a young adult
- It may give you more breathing room with your budget. You can use your card throughout each month and pay off your purchases during your grace period. This can be helpful when you’re working with a tight budget or while you’re waiting for your paycheck to arrive.
- It helps you build your credit score. As you consistently make on-time payments, your credit score will steadily go up.
- You might even bag a few perks. When you’re starting out with credit, don’t expect too much in terms of card benefits. But you could earn rewards and student-specific perks that you wouldn’t get by using a debit card or cash.
- You’ll learn early how credit cards work. When you’re ready to apply for more powerful cards, you could already be well-versed in how to use a credit card responsibly.
- Low credit limits. Lenders won’t initially trust you with much credit. However, your provider may review your account and offer a higher credit limit after you’ve had your card for a while.
- High interest rates. Carrying a balance is an especially bad idea when you’re starting out, as your card’s APR will likely be high.
- Risk of getting into debt. You may encounter many temptations to spend, and having a credit card can make you feel like you have more money than you really do. Strongly consider spending only what you can pay off in full each month.
- Risk of damaging your credit score. If you don’t use your credit card responsibly — such as missing payments or exceeding your credit limit — you could hurt your credit score.
As long as you use them correctly, credit cards can be highly useful tools that help you build your financial future. Take your time, evaluate your options and pay off your card debt in full every month.
For more information about student credit cards, check out our guide on the topic.