Recent (and soon-to-be) college grads: this week, we’re looking at you. So much is changing so quickly and suddenly you’re working nine-to-five, you’re paying bills, you’re making money, and you’re cut off from the comfort of your parents’ income. In this transition time, it is so important that you start building your own credit. Here’s the 411 on opening your first credit card.
Why get a credit card? In the future, things like a house and car will likely be way out of budget for you to make a one-time payment. (It’s not just you, it’s everyone.) So you’ll have to borrow money to make those purchases. In order to be approved for a mortgage or car loan, the bank wants some assurance that they can trust you to pay it back over time. Establishing a credit card account and using it responsibly helps with that.
When you use credit card, your activity is compiled into a report (called your credit report) based on how you use your card(s) and then those facts are turned into a score (called your credit score). The higher your score (up to a max 850), the more likely the bank is to trust you enough to give you a loan, and the lower the interest rate you’ll pay for it — which is the goal. So, if you start building credit early, down the line, your bank account will thank you. “It’s a great way to start building credit,” says Kristy Archuleta, Associate Professor in Financial Planning at the University of Georgia and Past President of the Financial Therapy Association. She recommends using your new credit card to buy routine monthly items, like gas and groceries, and pay off the balance in full at the end of each month, in order to positively jumpstart your credit life.
When should you open a credit card? “The sweet spot is junior or senior year of college — if you are mature enough,” says Beverly Harzog, Credit Card Expert and Consumer Finance Analyst for US News and World Report. By opening a credit card this young, you have some time to establish a credit history so when you are ready to rent your first apartment, you’re more likely to be approved. (Yes, landlords check credit, too.) If you’re not ready for your own card or can’t qualify for one, you can ask your parents to add you to one of their cards as an authorized user, Harzog suggests. That helps build credit, too, as does opening a secured credit card (where you have to make a deposit with the issuing lender to get it.)
How do I know if I am ready? Ask yourself: Do you have a debit card? If the answer is yes, do you make impulsive purchases? Have you ever overdrawn fees on your debit card? Overall, could you have done a better job in managing that debit card? If you answered “yes” to one of those three questions, you might want to hold off on opening a credit card until you have established better spending habits, says Harzog. If you are known to have problems with spending, you should hold off, too, says Archuleta. The freedom of credit can lead to overspending which could get you into debt — something you definitely want to avoid.
Which credit card is the best? If you’re already in college, consider a student credit card (you can find many with a quick internet search.) If you’ve graduated and have started a job without a credit history, you start receiving solicitations for unsecured cards now that you have an income, says Harzog. And if not, surveying the landscape at the credit union or bank where your paycheck is deposited is a good place to begin. No matter the card, make sure to read all the fine print so you know of any fees that could pop up down the line. And then, start swiping (responsibly). Take a look at your approved APR, “sometimes it’ll scare you straight,” says Harzog. With that said, always keep a low balance and pay off that balance in full by the due date. You’ll thank me later.
With Rebecca Cohen