Having a credit card – or even a couple of credit cards – isn’t always a bad thing for young adults, provided they learn about credit management and use credit wisely.
If you (or your child) have just turned 18, are preparing to enroll in college or even graduated from school fairly recently, you need to work hard to build a positive credit rating and get your credit track record off to a good start.
A good credit score is a measure of how well you handle your credit obligations and may help you rent an apartment or get a mortgage in the future, secure a car loan at a competitive rate, or even qualify for cheaper car insurance.
Many creditors and non-creditors alike (such as prospective employers) review an individual’s credit report during the application process, so it’s a good idea to have at least one credit card on your record.
But how do you choose a credit card when you’ve never had one before?
Here’s what you need to know about the types of credit cards that are usually best if you’re getting that first credit card.
Bank Credit Cards to Build Credit
Many banks offer unsecured credit cards such as a Visa card or a MasterCard to eligible applicants.
If you are just starting to build up some credit history, it’s likely that your credit limit on these cards will be very low. Remember, however, that your goal isn’t to use these credit cards to make frequent purchases or to go out and charge big-ticket items.
You just want to charge relative small amounts and use the card to establish some credit history. You’ll do this by regularly charging modest sums on your credit card and then (a few charges per month are plenty). Then you must make sure that you’re making at least the minimum payment every month so that you maintain a good payment history record. Ideally, you would pay off the balance in full.
Keeping your credit balances low – or even at zero balances after you pay off your monthly bill – will help boost your credit score. That’s because 30% of your FICO credit score is based on how much credit card debt you owe; having lower balances increases your score, while higher credit-card balances drag down your credit score.
Store and Gas Credit Cards
If you aren’t approved for a bank credit card, you can try to get a department store credit card or a credit card from a gas company instead.
These types of credit cards aren’t the best to have from a credit standpoint, but they are an option since they’re usually much easier to be approved for and can still be used to build some credit history.
If you do charge purchases on a department store card or a gas card, remember that these types of cards often carry very high interest rates. So you’ll definitely want to keep your balances to a minimum and make sure to always pay more than the minimum payment so you’re not collecting interest each month. Once again, paying off your balances in full is the optimal way to handle your cards.
Secured Credit Cards to Build Credit
Secured credit cards can be easier to get than other credit cards because they require the cardholder to pay a deposit. This deposit acts as the credit card limit, so you are essentially paying for a credit line just to establish some credit history.
Secured credit cards can be a last resort if you aren’t eligible for any other types of cards, and they do have limitations.
Some carry relatively high fees that are incurred right away on your account. This means you’ll probably see your deposit shrink over the course of the year just to maintain the card. Still, a secured card is a good alternative for those who cannot get any other type of credit card to build credit history.
One final note about secured cards: do make sure you only get a secured card that reports your payment history to the credit bureaus. If a bank or credit card issuer doesn’t transmit information about your secured card, its monthly balances and your payment data to Equifax, Experian and TransUnion, then that card won’t do anything to establish or boost your credit rating.