Some good deals exist, but many young consumers shopping for credit cards may be choosing between cards with high interest rates, low credit limits and stingy rewards programs, says Matt Schulz, senior industry analyst for CreditCards.com. Establishing good credit habits now, however, can make it easier to qualify for better cards and bigger loans later on, he says. Here are some things to keep in mind along the way.
Start with a secured credit card. People who can’t qualify for regular credit cards on their own can build credit with a secured credit card, which works by requiring consumers to put down a few hundred dollars in cash as collateral. Then typically, consumers receive a credit limit equal to the amount of cash they put down, say $500. Borrowers who use the cards but fall behind on payments lose their cash deposits. But those who show discipline and make regular payments on the card for a year or two might qualify for a traditional credit card with a larger spending limit, says Greg McBride, senior vice president for Bankrate.com.
Some people may be thinking about having a parent co-sign on a credit card or about becoming an authorized user on a parent’s card, but the parent would be on the hook if the child falls behind on bill payments.
Consider a retail card. This option isn’t ideal because credit cards issued at retail stores tend to have higher interest rates. Last year, for instance, the average annual percentage rate charged by retail cards was 23 percent, according to CreditCards.com. They also typically have lower credit limits of about a few hundred dollars, which makes them easy to max out. But because it’s typically easier to qualify for a retail card than a more traditional credit card, the cards can be a way for young people to start building up credit, Schulz says. It’s only a good idea if you can pay the card off each month — and on time.
Know the fees. Consumers should watch for annual fees on credit cards, says Jill Gonzalez, a spokeswoman for CardHub.com. The annual fees might be worth it if they come with a generous rewards program. But for a person just starting out, it’s probably best to avoid cards that charge annual fees. Also be careful with cash-advance offers, which let people tap their credit by writing a check or pulling money from an ATM but tend to come with high transfer fees and steep interest charges.
Use them wisely. Consumers need to use their credit cards in order to start building their credit histories and establishing a track record of on-time payments. But they don’t need to carry a balance from month to month to get those benefits, a common misconception among people who are new to credit, says McBride. Paying the bill off each month makes it possible to avoid interest charges, he says, which is especially important for young consumers who might be facing interest rates close to 20 percent because of their low credit histories. Paying the balance completely each month can also help to boost your credit score, since lenders don’t like it when borrowers use a majority of their available credit.
Be on time. This is probably the most important habit. As our columnist Michelle Singletary has said, the easiest way to improve your credit is to pay the bills on time. Every debt. Every time. Payment history accounts for 35 percent of a person’s credit history. Messing that up early on won’t open doors for more loans later on—it can shut them.