Just graduated from college? This guide offers options for your journey to building a good credit score and avoiding debt.
Just finished school? Here’s what you need to know before getting started on your credit journey
It’s graduation season – congratulations to the class of 2021!
Besides all of the usual academic rigors, you also had to endure a pandemic en route to your degree. It wasn’t always easy, but you made it. Good for you. As you get started on your credit journey, here are some of the best credit cards for new and recent grads.
Most of this advice pertains to college graduates because since the CARD Act went into effect in 2010, it became difficult to get a credit card before your 21st birthday. It’s technically possible to get a credit card in your own name as long as you’re at least 18 years old and have proof of income, though lenders are much stricter than when your parents were in their late teens and early twenties.
First things firstBefore we talk about picking a card, it’s crucial to highlight the importance of paying your credit card bills in full and on time. With an average interest rate north of 16%, it’s expensive to carry credit card debt from month to month.
Many young adults shy away from credit cards for this reason. They generally prefer debit cards, and they often use “buy now pay later” services such as Affirm and Afterpay when they need a little more time to pay off a purchase (hopefully without interest). Credit cards offer better buyer protections, though, and there’s tremendous rewards potential as you get more established.
I think it’s important for young adults to use credit cards for at least some of their purchases in order to establish a strong credit history. This will serve you well in so many ways, including the ability to rent an apartment and sign up for a cell phone plan, and later access other financial products such as mortgages, car loans and more lucrative, luxury credit cards.
For newly minted high school grads
If you just finished high school, your best bet is probably either a student credit card or a secured credit card. It’s also worth considering getting on a parent’s credit card as an authorized user. This can jump-start your credit history and help you access more prestigious rewards right away.
Recent college grads have even more to consider
If this describes you, the good news is that it’s easier to obtain credit in your own name, but more opportunities bring more questions. Your first step should be to check your credit score. You can get it for free from Experian and Discover (among others). Most credit card issuers are looking for scores in the upper 600s or better.
It’s possible that you don’t have a credit score at all if you’re just starting out. Or if you do, it might be relatively low. That’s okay. You can usually bring it up pretty quickly. And there are several new credit cards that cater to people in your situation. Two that I especially like are the Petal 1 “No Annual Fee” Visa Credit Card and the Tomo card. Both practice forms of cash flow underwriting, which go well beyond the credit score.
They look at how much money you have coming in and how much you have going out. This allows them to make more detailed decisions and potentially approve more people with higher credit limits. Those higher limits are a huge advantage over secured credit cards, which often limit your purchasing power to no more than a few hundred dollars. Petal and Tomo are both fee-friendly and make a lot of sense for recent grads.
Another one of my favorite no-annual-fee cash back credit cards is the Citi Double Cash Card, which gives you 1% cash back when you make a purchase and another 1% when you pay it off. (This doubles Tomo’s 1% cash back rate, and at many merchants it beats the Petal 1 Visa, which gives 2-10% cash back at select merchants but no rewards at others.) The Citi Double Cash is generally marketed to individuals with good-to-excellent credit, which typically means a credit score of 670 or better, though that’s not a guarantee of approval.
You won’t get rich off the rewards on any of these cards, but that’s not the point. When you’re new to credit, it’s all about establishing a strong track record of on-time payments while avoiding too much debt. Even if you just put an occasional small purchase on the card and pay it off right away, you’re making progress toward a strong credit score, which will serve you very well in the future.
Have a question about credit cards? E-mail me at firstname.lastname@example.org and I’d be happy to help.