When Cole Edwards and his longtime girlfriend were ready to take the next step after college graduation, he was thankful that he’d put in the effort to build good credit. It made it possible to finance an engagement ring at 0% interest with a good credit card.
“I knew the timing was right after dating for four years,” says Edwards, 24, who graduated from Virginia Tech in 2014. “The payments gave me the flexibility to propose now.”
Building credit is an essential step in everyone’s financial life. It’s possible to get by without good credit, and it may even seem unnecessary when you’re just starting out, but you’ll find that it matters when it comes time to get a car loan, mortgage or other financing. Your credit will affect the loan terms you get — and whether you get approved at all. It can even help you land an apartment or a job, since landlords and employers commonly check credit reports.
The quickest and easiest way to build credit is with a credit card, used responsibly. But it’s not as easy for young adults to get a credit card as it was in the past. You may need to hitch yourself to someone’s good credit to start the clock on your credit history.
Getting a credit card under 21
Credit card options are slim for people under 21, so you want to take advantage of any opportunities for a head start. The Credit Card Act of 2009 prohibits issuers from giving cards to people under 21 unless they have proof of income or a co-signer — someone willing to put their credit at risk to help you build yours.
Your options at this stage include:
- Finding someone with good credit to add you as an authorized user. Usually, this will be a parent or another relative. When you’re an authorized user, you get a card with your name on it, but the primary account holder is responsible for paying the bill.
- Getting a student credit card. Simply being a student is not enough to get a student card. When you’re under 21, the same rules apply as with regular credit cards: You’ll need to show proof of income or find a credit card issuer that allows co-signers. Co-signers assume responsibility for your debt if you can’t or won’t pay it. However, most major issuers no longer accept co-signers.
Authorized-user and co-signer options can help you jump-start your credit, but you’ll still need your own credit card account later.
“I caution consumers against using a credit card that they are an authorized user or co-signer on as their main resource for building credit,” says Heather Battison, a vice president at TransUnion, one of the three major credit bureaus that gather information used to calculate credit scores. That’s because with these options, the fate of your credit is in someone else’s hands. There can be negative implications if the other signer makes late payments or misses them altogether, Battison said in an email.
During college, Edwards was an authorized user on his mom’s card. “It was only for emergencies, so I rarely ever used it,” he says. Still, it did the job. With a few years of credit history under his belt, Edwards got a regular credit card after graduation.
Getting a credit card in the ‘real world’
Student loans can help build credit if you’re making on-time payments, but it’s better to diversify the types of credit you have.
Having multiple credit lines shows ability to keep up with different types of payments, says Thomas Nitzsche, a spokesperson at Clearpoint Credit Counseling Solutions, a nonprofit organization that provides financial counseling in 16 states.
“It’s just like if you go look for a job and your resume shows a thin work history,” Nitzsche says. “You want to have plenty of time to build up that payment history and show responsible credit usage.”
Once you turn 21, there are more options available for newcomers to credit:
- Secured credit cards. These cards require a security deposit, which reduces the risk to credit card issuers, making these cards easier to get. Your credit limit is usually equal to the amount you put down. Minimum deposit amounts vary by card. You get the money back when you close the account or upgrade to a regular, unsecured card.
- Retail credit cards. These cards are accepted only at one store or group of stores. Easier to get approved for than regular bank credit cards, these are a good plan B. Many even offer rewards and discounts. Still, for them to help you build credit, you have to use them responsibly and make payments on time.
Don’t get discouraged if one credit card issuer denies your application. Learn from the rejection and identify a card you can get.
Choosing and using a credit card
You need a credit card that reports to all three credit bureaus: TransUnion, Experian and Equifax. Lenders and creditors pull reports from different bureaus, and each one calculates its own scores. You want your good payment history to be recorded by all of them.
Once you’re approved, try to keep your balance below 30% of your credit limit. To avoid debt and interest, pay your balance in full each month.
Do it right, and you’ll be on your way to enjoying the benefits of good credit.