Maya, 25, is an associate TV producer in Charlotte, North Carolina, and has always stayed away from credit cards because she’s heard terrifying stories about them. She also hates keeping track of bills, so she’s worried about what could happen if she got her hands on plastic. However, some of her friends get free flights and cash back from their cards, and she’s curious about what she might be missing. She also knows that she should open at least one credit card to start building “good credit,” for buying a new car or potentially a house someday. Where should she start if she wants to get in on the game, but cautiously?
I was 20 when I opened my first credit card, and let it be known: I am one of those cautionary tales. It was the summer before my senior year of college, and I had an unpaid internship in Boston that I subsidized with a part-time job at Aveda. (Despite my surprising aptitude for selling shampoo, I made just above the minimum wage.) One afternoon, seeking the dignity of new, non-tattered underwear, I went to the Gap — nothing extravagant. There, a chipper saleslady dangled a “special, very limited” offer that would give me 30 percent off my purchase if I opened a Gap credit card. I filled out the form in two minutes, got my discount, and still have the strapless bra I bought that day.
Like you, Maya, I had been told by many people — including my own well-meaning parents — that it was a smart idea to open a credit card to start building credit history as soon as possible. Netting free underwear while I was at it seemed like an extra-responsible move. I figured I’d pay the bill in full once I got my next paycheck, and then — well, that was the problem. I didn’t really consider what would happen after that. I didn’t even know what a FICO score was, let alone my own.
I had zero foresight about the ramifications of missing due dates. I didn’t even have a permanent address. The bills were mailed to my parents’ house, and I went back to school and promptly forgot about them. I graduated from college with several hundred dollars on that ridiculous card, ballooning interest, which horrified my parents when I told them. Their graduation present to me was paying off the balance, which I’m not proud of. Indeed, I was so embarrassed by the whole affair that I closed the account, snipped up the card, and decided I couldn’t be trusted with one ever again.
My story and yours are quite common among people in our age group, as you may have heard: Perturbed by the prospect of debt, millennials are more likely to stay away from credit cards entirely than previous generations. Earlier this year, data from the Federal Reserve indicated that the number of Americans under 35 with credit-card debt had fallen to its lowest level since 1989, according to an analysis by the New York Times. On one hand, it’s great that we’re so careful and solvent, but on the other, we may be missing opportunities to build good credit.
It’s counterintuitive, but avoiding debt entirely will actually hurt you when you’re trying to land a big financial fish, like a mortgage. Without consistent credit history, you won’t be able to get the low-interest rates that you deserve for being a decent steward of your money — and it’ll cost you in the future.
Curious about this trend that we’re part of, I called Sean McQuay, who evaluates credit cards for a living (which truly sounds like my worst nightmare). He’s a credit and banking expert at NerdWallet, a website that offers a handy comparison tool for figuring out which credit cards work best for what you spend money on (travel and restaurants versus gas and groceries, etc.), among other financial advice.
“A lot of millennials are shying away from credit cards because they experienced the financial crisis during their formative years, and developed a deep fear of going into debt,” Sean told me. “They view credit cards as the easiest mistake to avoid.”
What’s more, 20-year-old me wouldn’t be able to get a hold of that Gap card so quickly today. Thanks to a 2009 law called the CARD Act, credit cards are much less accessible to young people (those under 21). “It’s now illegal for young people to get credit cards as easily as they used to,” said Sean. “I started college before the CARD Act was passed, and my freshman year, I signed up for a credit card at a booth on campus in return for a free Subway sandwich. That doesn’t happen anymore.” Keeping credit cards away from students who can’t afford them is a positive thing, but it also means that young people have less exposure to credit cards in general.
Sean wants to spread the gospel that credit cards are not mysterious, debt-inducing traps. “There’s this idea that credit-card companies use points to trick consumers into spending more than they should, and that’s certainly true for some people,” he said. “But most credit-card companies, particularly big ones, make money from my credit card even though I use it responsibly.” Rather than profiting solely from jacked-up interest on late payments, these companies also make money off of interchange — small fees that stores pass along to them every time you make a purchase with your card. “It’s not like they want people to make mistakes,” Sean explained. “They want me to pay them back. I view them as my partner in helping me make the most of my money.”
And with that optimism in mind, Maya, Sean recommends setting up your first card straightaway. “By the time you need good credit, it’s too late to build it,” he said. “It takes years. And the safest and easiest way to do so is using credit cards intelligently.”
Another reason to get going: On average, women have worse credit scores than men, although they tend to carry less debt (economists attribute this to the gender wage gap, among other factors). Don’t be part of this statistic.
Beverly Harzog, a credit guru who writes exhaustive reviews of credit cards on her website, told me that she knows a number of women who never built good credit because they always used joint accounts set up by their spouses (this was more true in the past; women didn’t even have the right to open a credit card in their own name until an anti-discrimination law was passed in 1974). Maya, you’re probably not part of the demographic that needs to worry about this, but it’s just another reminder to tend to your credit, because it’s yours and yours alone.
The first step: Find out your FICO score. You can do it on most bank websites for free; do not go to random websites advertising free credit reports. Most of these are actually credit-report monitoring “services” that will rope you into a subscription of some kind. Steer clear. Also, don’t obsess. Credit scores are slippery beasts, and fluctuate regularly for reasons way more complicated than I care to understand. Sean likened your score to your weight: It’s wise to keep an eye on the general trajectory, but there’s not much benefit to checking it more than once every three months or so.
Based on your score, you can then assess your options. If your score is higher than 720, you’ll have lots of them. If it’s lower, then you might not be approved for cards as easily. It’s common for young people to have less-than-stellar credit scores, especially if they’ve never had a credit card. Don’t freak out if this is the case.
For people with a not-so-great FICO score (below 700), Beverly recommends getting a secured credit card, which is easier to qualify for than a normal one. You have to put down a deposit for it — some of them start around $200 or $300 — but otherwise, it works the same. You can then use it to build up your credit until your score is high enough for a regular, unsecured credit card, ideally one with more rewards. If you’re going this route, Beverly recommends the Discover It secured card, which is marketed to young people (her own daughter used a version of it) and offers an easy path to get “promoted” to an unsecured card once their credit is good enough. “It might take a year or so,” she said. “But that’s a safe way to do it.”
If your credit score is closer to 700, another card Beverly recommends for first-timers is the Chase Freedom card, which offers decent cash-back rewards and other perks — although typing this stuff makes me want to go to sleep, so you should find out more details from the many reviews of these cards online, which feature thorough analyses of their fine print. One more tip, from Beverly: If a card has an annual fee, it’s often waived for the first year, and if you pay your bills on time, you can usually call the card’s helpline and get it reduced.
Meanwhile, heed your nervousness. “I think being a little bit afraid of credit cards is healthy,” said Beverly. “There’s some danger with them, and you should be cautious.” The most essential, no-holds-barred, No. 1 priority is to pay off the entire balance on your card every month, no excuses. If that means you don’t use it much, that’s fine. A carryover balance is one of the worst kinds of debt you can have. “Some people think it’s better for your credit to carry over some debt every once and a while, and that’s not true,” Beverly explained. “I cannot overstate how important it is to pay off the full amount by the due date, especially when you’re first starting out.”
A lot of people get hung up on a credit card’s APR — that stands for “annual percentage rate,” otherwise known as the whopping interest that will be added to your balance if you don’t pay it off each month. They range widely and wreck your finances (see here). However, you’ll never have to worry about your APR if you don’t carry a balance. As you’re already used to covering your expenses with your normal checking account, don’t change anything — just put a few of those expenses on your card and pay them off immediately.
By all means, set up an auto-pay function with your checking account so that you don’t miss the due dates. And for now, don’t play with grace periods, which is the window of time between when you purchase something and when the bill is due. If you don’t have enough money to buy something right now, you shouldn’t put it on your card.
Once you build credit and get more comfortable using your card and monitoring your bills, you’ll be eligible for more cards with better rewards structures — think points, miles, cash, free dinners, or whatever your “thing” is. But as a credit-card fledgling, don’t try to get fancy. These rewards are never worth spending more money than you would otherwise, and they definitely never outweigh the cost of carrying debt on your card. Before you delve into the wider world of perks, take it easy and track your expenses. Two years ago, I realized that I was spending a lot of money on Delta flights (they’ve taken over a lot of New York airport real estate), and I sacked up and applied for a Delta American Express card. I have since taken two free round trips to California with miles I earned — some, I should add, from buying Gap underwear.