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Credit card debt can be brutal and punishing — as the total amount of credit card debt in the US surpassed $1.02 trillion late last year, there’s no question that it’s something you generally want to avoid, especially if you’re younger and less financially stable.
This is a message that younger generations seem to have received loud and clear. Data suggests that millennials have been wary of cards, although a recent study shows that they may be starting to embrace them.
While that might seem like bad news, it’s actually a positive for the millennial generation, and as Generation Z reaches adulthood, it’s vital that they follow suit — responsibly, of course.
That’s because the responsible use of credit cards is an essential part of establishing a healthy credit history, which is vital for securing major consumer loans and mortgages. While this is a little more relevant for millennials, right now, than it is for Gen Z, it’s smart to start thinking about this early. I’ve known people five, six, and seven years out of college who’ve had trouble opening utility accounts, or signing up for a now-needed credit card, because they had no credit history. That created a ton of headaches that would have been easier if they had started building credit during school.
Once you have a credit card, the key is to simply use it exactly as if it was debit cards.
Practicing healthy financial habits, not spending more than you can afford, and paying off your cards in full each month — or even each week — helps you avoid debt, interest fees, and negative data points on your credit report.
A lot of the fear of credit cards comes from a misunderstanding of how they work. Just because you use one doesn’t mean you’re taking on debt — you can (and should) pay more than the minimum required payment each month. If you pay the full statement amount — or the full balance — before the due date each time, you won’t be charged any interest. Plus, you’ll be able to earn rewards or take advantage of various protections and benefits.
If you (or your child/dependent) is starting college this fall or getting ready for another new semester, it may be worth thinking about your credit.
Here’s a quick primer on how credit and your credit score work, why it’s important, and the best options for a first (or first “real”) credit card.
What’s your credit score, and why is it important?
Virtually every American has a credit profile associated with them, which is a history of their use of credit, including accounts held, past borrowing, and payment history. Banks that issue loans and credit cards use the information in your credit profile to determine how trustworthy you are, and how likely it is that you’ll pay back whatever you may owe in the future.
Your credit score, meanwhile, is a numerical representation of all of the raw information in your credit profile. It’s made up of a few components, including your history of on-time payments, how much outstanding revolving debt you have proportionate to your total credit line, the average length or age of your credit history, how often you’ve requested new credit recently, and different types of credit you have like car loans and credit cards (having more types is better).
In addition to banks, other parties might use the information in your credit profile to determine your trustworthiness. For example, most landlords will run a credit check before approving your application to rent an apartment. Similarly, companies like utility providers and cell phone carriers check your credit score to make sure you’ve displayed responsible payment behavior in the past.
Starting to build credit
For college students, there are three good ways to start building credit.
Become an authorized user on a parent’s account
If you’re 18 or 19, chances are you have virtually no credit history. Even if you’ve taken out student loans (which go on your credit report) you won’t have started repaying those, so there won’t be any positive data.
To start building credit history, the best option is to be added as an “authorized user” on a parent’s account.
When you’re added as an authorized user, you’ll get a card with your name on it, but connected to your parent’s account. A lot of parents might want to do this so that you have a card to use in case of an emergency, but there’s a second benefit.
Even if you never make a charge on the card, the entirety of that single account’s history will be added to your credit profile. Of course, it’s important that the account you’re added to doesn’t have any negative marks, so that you only have positive data points.
When I left for college, my mom added me to her oldest account, an Amex card. When I checked my credit report a few years later using Credit Sesame, I saw her entire account history on my profile as if it were mine — it showed “my” account as being older than I was!
Open a secured credit card
If you’ve never been added to a parent’s account, or you aren’t able to be, or your parent doesn’t have an unblemished account to add you to, you still have an option — get a secured credit card.
A secured credit card is one where you put down a deposit — for example, $200 — and then you get a card with a credit limit of the same amount. You can pay the card on time and prove that you’re responsible, and eventually upgrade it to an unsecured credit card and get your deposit back.
You can usually get a secured card from the primary bank you use for your checking account. Alternatively, Discover offers a solid option that even earns cash back.
Open a “real” credit card
Although being an authorized user on an account, or having a secured credit card, is definitely a useful way to build your early credit, you should still open a “real” credit card as soon as you have that early history established. You can open a student credit card through wherever you bank, but a better option is to open a solid cash-back or rewards card.
The Chase Freedom Unlimited is an ideal option.
The card earns unlimited 1.5% cash back on all purchases, and has no annual fee. Plus, it features an introductory 0% APR for the first 15 months, so if you want to break the rule and carry a balance for a few months (for instance, if you need to replace an aging laptop but it’s a bit too pricey right now) without paying interest, this provides a great opportunity (after the introductory APR offer, a variable APR of 16.74-25.49% applies — so you should definitely make sure to pay off the balance by then).
The card also offers a sign-up bonus of $150 when you spend $500 in the first three months.
You can read more about the card here, and see how I’ve previously taken advantage of the 0% APR offer.
While there are a few cards out there that offer 2% cash back, the real appeal of the Freedom Unlimited is that while the card is marketed as “cash back,” it actually earns Chase’s proprietary Ultimate Rewards (UR) points that you can redeem for cash (1 point = $0.01).
When you’re ready to upgrade to a card that earns better rewards — so that as you get older, you can start enjoying free travel by using your points— you can pool your points from the two cards, and get a bonus when purchasing travel, or transfer them to travel partners.