Striking out on your own after college can be challenging for financial novices.
For graduates with record student loan debt and entry-level jobs or worse, no jobs at all, learning to manage debt wisely will pave the way to a good credit score. That in turn creates opportunities down the road, including the possibility to refinance student loans at a better rate.
While it’s not the only way to build credit, a credit card may be a good place to start, according to Angie O’Leary, a senior vice president in the wealth management division of U.S. Bank, “but make sure you can pay it off every month.”
In fact, only 40 percent of people ages 18 to 29 do pay off their balances each month, compared with 53 percent of adults over age 30. And 18- to 29 year-olds were also most likely to miss payments completely, according to a recent report by Bankrate.
“You need to build a credit profile.”
As a result, many millennials are forgoing credit cards and as a consequence establishing a credit history altogether. About 63 percent of millennials don’t have a single credit card, compared to 35 percent of adults over 30, Bankrate said.
“There is a lot of fear of credit cards in the wake of the financial crisis,” said Matthew Goldman, CEO of credit card comparison site Wallaby Financial, a division of Bankrate. “They are afraid of not being able to control themselves.”
“From a healthy financial perspective, they may want to avoid credit card debt and use only debit cards — that’s a short-sighted view,” said Sean McQuay, credit cards expert for consumer finance site Nerdwallet. “You need to build a credit profile.”
Other forms of debt for those just starting out, like student loans andcar payments will also help establish your credit profile, as long as the payments are made on time. Some alternatives to credit cards, like debit cards linked to a checking account, or prepaid cards, which act as a defense against overdrafts, can help build good habits, but right now neither contributes to a credit history.
Choosing the right — and right type of — card can make a difference. Grads who have never had a credit card before will likely need asecured credit card to start. Some secured cards, like Discover it, which requires a cash deposit that then serves as the credit line, can be a good fit for those without a proven payment history, according to Jill Gonzalez, an analyst at credit card comparison site CardHub.
Then there is the partially secured card, like the Capital One Secured MasterCard, which lets you get a credit line in excess of your security deposit, depending on your credit standing and disposable income (with no annual fee).
To skip the secured card route, there are cards that require a co-signer.In that case, the parent, or co-signer, is responsible if the account isn’t in good standing.
If you are considering graduate school and still have an email address with an “.edu” extension, you may be eligible for a student card, likeBankAmericard Cash Rewards for Students, which offers an initial bonus and cash back on gas and groceries. These types of cards, however, may suddenly expire when you graduate or turn 25, and you could be automatically rolled into a new card with fees, fewer rewards or a higher interest rate, Gonzalez said.
If you have a full-time job and enough of a credit history to get a standard credit card, you may want to choose a card that offers cash back with no annual fees, like the Citi Double Cash Card.
With any card, aim to keep the credit utilization below 30 percent, which means, for example, only spending $300 each month if there’s a $1,000 limit, and paying the bill in full, McQuay said. Just like college, “your credit card should be viewed as a long-term bet,” he said.
“Someday, every recent grad will want to buy something on credit so they need to invest in a good credit score now,” he added, “otherwise, it will be too late.”