At 19 with no income, it’s time to explore other ways to build a credit history
Dear Opening Credits,
I’m 19 years old. I have never had a credit card before. I want to start building credit. I have no job, but my boyfriend has monthly income. He said he’s going to help me make the payments for a credit card. I just want to know how exactly does a credit card work? What credit card would be best for me to get? And, what is the maximum amount money can I get on a credit card for a no more than $50 monthly payments? – Abigail
Glad you asked! The more you know now, the fewer mistakes (if any) you’ll make later.
If your boyfriend has a steady income, he can apply for a card on his own and add you as an authorized user on his card. But if he is not very responsible with his finances and doesn’t pay bills on time, then skip that idea as you want positive payment activity associated with that account reported to the credit bureaus, not negative information, such as skipped payments or high card balances. If you have a family member who is financially responsible and open to the idea of helping you build your credit, you may want to approach that person to see if you can get added as an authorized user on one of their card accounts.
In the meantime, here are answers to your other questions:
How does a credit card work?
A credit card represents a line of credit, which is a fixed amount of money that a financial institution has agreed to lend you. Every time you use the card, you’re borrowing money. It’s called “making a charge.” If your card has a $1,000 limit, you can spend up to that sum, but it’s best to never max out your credit line. Instead, keep your monthly charges well below (less than 30 percen of your credit line) to what you can actually borrow.
Each month the credit card issuer will send you a statement outlining what you bought, from whom and for how much. It will also include the total of what you owe, which is your account balance. As long as you pay the minimum payment – typically 2 to 3 percent of the balance – by the due date, you will keep the account in good standing. However, if you pay less than the total amount you charged that month, the remainder of what you owe after you make the minimum payment will be pushed over to the next billing cycle, and interest will be applied. The higher the annual percent rate (APR) rate, the more that will be added to what you owe. Interest compounds, too, meaning if you don’t pay the entire amount owed and roll over a balance from month to month, you’ll be paying interest charges on top of the previous month’s interest charges. That’s when things can get out of control, so do your best to pay off what you charge in one or two billing cycles.
Video: Credit card payment due dates explained
For example, if you have a card with a 17 percent APR and charge $1,000 and only make the minimum payments, it would take five years and almost $490 in interest to pay that debt off. If you have a card with a higher APR, say 29.9 percent APR, and only make minimum payments on the same $1,0000, it would take seven years and cost you $1,261 in interest charges. But, if you charge $100 and pay the entire $100 back by the due date, no interest charges will be assessed.
What credit card is best?
There are two main types of credit cards: secured and unsecured. Secured cards require a deposit of several hundred dollars and are geared to those looking to start building their credit. Unsecured cards generally are approved for more experienced credit customers. Since you are new to credit, you’ll most likely have to start with a secured credit card. A low APR is nice but even if it’s high, it won’t matter if you pay the entire bill by the due date as interest isn’t assessed if you pay off the entire balance every month.
So, if you can only pay $50 a month, then the wisest move would be to only charge $50 a month on the card.
The best card for you is the best card you can get once you are gainfully employed. Which sounds like a riddle, but it’s not.
Imagine a stranger approaches you for a loan. She’s not working, so can’t give you any assurance that she can repay. Nor does she have a traceable borrowing history, so you can’t find out if she’s been responsible with others in the past. Doing business with her would be terribly risky, and you’d be wise to deny her request.
On the other hand, if this woman has a steady job that pays enough to cover her expenses plus some spending power, you’d feel more confident in her repayment ability. And if she offered to let you keep a laptop or valuable jewelry for the duration of the loan, you’d be more apt to lend her the money, even with no credit history. If she didn’t pay you back, you could just sell the property and wouldn’t be out anything.
Now you may understand why a secured credit card will be right for you, though first you must secure your own job and save up enough cash to put down as collateral. The deposit can be as low as a couple of hundred dollars, and the credit line is usually equal to that.
What else you need to know?
Once you have the secured credit card, the issuer will send your usage and payment activity with the card to the credit reporting agencies. By charging and paying in full and on time, your credit rating will increase.
After a year or so, some issuers will let you reclaim your deposit and make the account unsecured. You may also be eligible for a credit line increase. Or you can apply for a new, unsecured credit card so you have greater borrowing power.