How to get your first credit card
My son just graduated from college and is trying to get his first credit card, but he’s hitting dead ends. His two rejection letters from banks say the decisions were based on “not enough accounts opened long enough to establish a credit history” and “insufficient balance in deposit and investment accounts with us.” He has a reliable but small income as a research assistant, but, amazingly, he’s saving 17% of each paycheck. This kid is frugal, responsible, and frustrated. What can he do to get a card?
—Andrew Derring, Hobart, Ind.
This Catch-22—you can’t get credit unless you have credit—is an old problem for college students and twentysomethings.
“Building credit is a lot like building a career,” said CreditCards.com analyst Ted Rossman. “Everyone wants you to have experience, but it’s hard to get experience if no one is willing to give you that first credit card or job opportunity.”
“It’s definitely harder these days,” Rossman added, citing the CARD Act of 2009 that shooed frisbee-wielding credit card marketers off campuses but made it hard to get a card before age 21 without sufficient income or an adult cosigner (a no-no for parents).
That said, there are steps a young adult can take to ease the process. And while there are no guarantees, the tips below should help your son get that first card and manage it well at an age when you’re prone to serious money mistakes with plastic.
Ask: Are you ready?
If you’re in college, get a card only if you can treat it like cash—paying the balance off in full on time every month. “At what age?” said Nessa Feddis, senior counsel at the American Bankers Association. “It depends on the kid, their circumstances, the parents’ finances. The key is to manage the credit responsibly.” At some point, especially after you’ve graduated, you’ll need a credit card, not only to make things like car rentals easier, but also to help start building a positive credit history that will lead to lower rates or auto and home loans years from now. “The sooner you get a card, the sooner you can use it to responsibly establish and build a credit history,” said Wells Fargo spokeswoman Sarah Dubois.
Check your credit reports
You can do this for free with all three credit bureaus (Experian, Equifax, and TransUnion) once a year at annualcreditreport.com. Make sure all the information is accurate. Errors are not uncommon, and they can lead to problems getting credit. If you find a mistake, contact the bureau right away to get it corrected. (The links are equifax.com/dispute, experian.com/dispute, and transunion.com/dispute.) A healthy credit report will improve your credit score, which can help you get that card. “Generally, the higher the credit score the better your odds are for approval,” said Chase spokeswoman Lauren Ryan.
Look into alternative ways of beefing up your credit
Some landlords report rental payments to the credit bureaus to place on your credit reports. That’s good, assuming you always pay on time. Check with your landlord. In addition, FICO and Experian have new programs that allow you to boost your credit without taking on debt. ExperianBoost helps you build credit through on-time utility payments. UltraFICO, which is currently in a pilot phase, boosts your score if you have well-managed checking and savings accounts. “FICO and Experian both believe that their new services will greatly expand access to credit for people who are new to credit or are rebuilding credit after a past misstep,” Rossman said.
Become an authorized user on a responsibly managed credit card
Authorized user status on an account whose primary card holder pays in full on time each month is good for someone with little credit. But beware, said the American Bankers Association’s Feddis: “If the parents’ activity is negative, it can negatively affect your own credit.” Big balances carried from month to month, and missed payments, are bad news for both the account owner and authorized users. An American Express card is the safest bet for this arrangement. You’re considered an “Additional Card Member,” with a completely different card number, whose activity is reported to the credit bureaus. Plus, if the “Basic Card Member” becomes delinquent, Amex will discontinue reporting to credit bureaus on the Additional Card Member’s card (yours) to keep your credit history positive.
If you’re ready, consider applying for a…
- Secured credit card. To get one of these, you put down a deposit equal to your credit limit—say, a few hundred dollars. Most banks report secured card activity to the credit bureaus, which helps you build your profile. Credit scores “look at secured cards the same as any credit card,” said Tom Quinn, vice president of scoring at FICO. After a year or so, card issuers tend to upgrade well-managed accounts to regular (unsecured) cards. The downside is you have to lock up some money while the card is secured, and your credit limit is low. “That makes it hard to buy more expensive things like airline tickets, but it helps keep people out of debt while establishing credit,” Rossman said.
- Store credit card. A card from Macy’s or Target may be easier to get. The next creditor will see that you managed a store card well and will interpret this is a sign of responsibility. Plus, you don’t have to charge a lot. “Anything that reports to the bureaus and is responsibly managed is going to help you,” said American Express spokeswoman Elizabeth Crosta. If you go the store card route, make sure you only have one of them, and be diligent about paying the balance in full each month.
- Card intended for students or for people with a short credit history. There are lists of the best ones for those with short credit histories and for students. The downside: These tend to have relatively high APRs, up to 27%, so make sure you pay that card off in full every month, or you’ll be paying a lot of interest. According to Chase, applying for a credit card with the bank where you have a checking account may help. (Make it a convenient one with no fees.) And per Discover, providing backup for your income through pay stubs or a W2 will help with the application.