Young adults shouldn't wait too long to get started with credit
Ted Rossman has seven years of experience in the credit card and personal finance industries as a member of the award-winning communications department at CreditCards.com and its sister sites The Points Guy and Bankrate.
Like a lot of young adults, my youngest brother had trouble signing up for his first credit card. He tried to get one last year at age 25, but was rejected because he lacked a credit history. He was stunned: he paid his rent, utility and other bills on time every month. What did the credit card company mean that he didn’t have a credit history?
He learned that none of that stuff builds credit and the only credit card he qualified for was a secured card with a $200 limit. That was a big disappointment, and very inconvenient, because he kept bumping against the $200 limit. It was especially impractical for more expensive things like airline tickets, which would normally be great to put on a credit card to get the rewards (as long as you can pay the bill in full at the end of the month).
After several months with the secured card, he was finally approved for an upgrade to a “real” (unsecured) credit card with a much higher limit, but this is a cautionary tale that surely speaks to many young adults.
How should younger millennials and Gen Z build credit?
Parents can be a big help here, but they need to realize that the rules have changed considerably since their teens and 20s. In the '80s, '90s and early 2000s, it was much easier to get your first credit card. Issuers marketed extensively to college students. I’ve talked with lots of Gen Xers and older millennials who signed up for their first credit card on campus, often in exchange for a free T-shirt, towel or similar low-value marketing gimmick. These weren’t today’s 60,000-point sign-up bonuses worth hundreds of dollars in cash or free travel, that’s for sure!
The CARD Act, which was signed into law in 2009, pushed credit card marketers off-campus and raised the minimum age for credit cardholders to 21 unless they can prove sufficient income. This is mostly a good thing that is preventing a lot of young adults from getting into trouble with credit, but the unintended consequence is that many responsible people in their early and mid-20s are having trouble establishing a credit history.
Here’s where parents come in: I suggest adding your child as an authorized user on one of your credit cards starting around age 18. By doing this, your child will begin establishing a credit history and will benefit from your positive track record of on-time payments. Note that this only works if you maintain good habits with your own credit. If you pay late or rack up too much debt, this strategy will backfire and you’ll hurt your child’s credit as well as your own.
If you go ahead with the authorized user approach and trust your child with money, you can give her the card and let her buy things with it. It’s possible to set spending limits with some card issuers. If you’re not comfortable with that, you can still add her as an authorized user to let her benefit from your positive payment habits, but stash the card away somewhere so she can’t use it.
There are other options, too
In hindsight, my brother probably waited too long to get the ball rolling. His intentions were good (he was afraid of getting into debt and he was able to make do with a debit card, Venmo, PayPal and so on), but he could have at least gotten started with the secured card at age 21 or 22 and that would have accelerated the process by a few years.
Another idea is to make a store credit card your first credit card. These cards are typically much easier to get, but since their average interest rate is nearly nine percentage points higher than the national average, it’s even more important than usual to pay the bill in full every month. If you can do that and want to sign up for a store card, get one that can be used anywhere (store cards are often only accepted by the issuing merchant).
The Gap Visa Card is a compelling example. You’ll earn 5 points per dollar spent at Gap and affiliated brands such as Old Navy, Banana Republic and Athleta and 1 point per dollar elsewhere. You’ll get a $5 reward for every 500 points you earn. The card also offers a sign-up bonus (20 percent off your first purchase plus free shipping, and ongoing benefits such as 10 percent off every time you shop at Gap and Gap Factory stores). Once you’ve shown that you can manage credit responsibly, you’ll be able to qualify for cards with even more lucrative sign-up bonuses and rewards programs.