If you are a young adult between the ages of 18 and 29, chances are you don’t have or use a credit card. That presumption is based on recent data indicating that 63% of people in the millennial age group don’t have a credit card. By comparison, about 65% of adults over 30 do have at least one credit card. The data also shows that you will eventually get around to applying for a credit card, not because you’ll change your mind about debt, which you try to avoid; but because you realize it’s going to be difficult to get through life without one.
This guide was created for young adults who may be looking to apply for a credit card and would like some tips on how to avoid the credit mistakes of older generations. One of the reasons young adults have shunned credit cards is they have seen the financial carnage wreaked upon their parents’ generation. The younger generation is very likely to avoid those problems, in part because of their attitude about debt. Many baby boomers and Gen Xers used credit cards to pursue a lifestyle that was beyond their means. On the other hand, the younger generations have thus far met their lifestyle needs with the use of cash.
There will come a time in all young adults’ lives when they will need a credit card. This guide can take some of the mysteries out of the process and shorten the path to good decisions which can save both time and money as well as spare some grief.
Why You Aren’t Into the Plastic
If you’re going to move forward and get involved in the credit card game, it would be important to explore a little about what has kept you out of it to this point. As we already mentioned, many in the millennial generation saw or suffered firsthand the financial devastation caused by the 2008 financial crisis. That was enough for many to simply avoid debt because nothing could possibly be worth going through that.
It Wasn’t Available to You
You didn’t take to debt early in your adult life, simply because it wasn’t as available to you. In prior generations, the credit card companies would pitch tents on college campuses hoping to lure in unsuspecting 18-year old freshmen and pitch them on the virtues of credit. Back then, young adults grew up with credit because it was easy to obtain as a college student. With the passage of the Credit Card Accountability Responsibility and Disclosure Act or 2009 (Credit CARD Act), it became harder for anyone under age 21 to get a credit card. Today, many college students go without a credit card, or they use one as an authorized user of their parents’ card.
Too Much Student Loan Debt
You may have managed to get through college without accumulating credit card debt; but chances are you were one of the nearly 60% of students who left school with student loan debt. On average, students in school today have more than $30,000 of student loan debt. That is enough to take away anyone’s appetite for more debt and most student loan borrowers have acted accordingly by not even considering credit cards.
It Didn’t Look Like Much Fun
The reason you have delayed getting a credit card could be you've seen the trouble other young adults have been having controlling their debt. According to a Bankrate survey, young adults who do have credit cards don’t seem to manage them as well as past generations. The data shows that only 40% of millennials pay their credit card balances in full each month. That is compared with 53% of adults age 30 and older. It also indicates that millennials were more likely to often miss payments. If that concerns you, there’s a whole section in this guide on how to avoid the irresponsible use of credit cards.
Preferred Other Methods of Payment
As for the convenience factor, your debit card has stood in nicely for a credit card, allowing you to forgo carrying cash and helping you more effectively manage your finances. Debit card users enjoy the convenience of swiping without the inconvenience of another bill. Plus, it is the millennial age group which has taken to new payment technologies. Now they simply wave or tap their smartphone to complete a transaction.
Never Needed a Credit Score Before
Finally, you may have arrived at this critical juncture in your life when it has become apparent that you need a credit card just so you can function as an adult. In a credit-based economy, regardless of whether you use credit or not, it gets to a point with anyone where they can’t really exist without a credit score. For the most part, you can’t build a credit score without using credit cards.
The Importance of Using Credit Cards
Generally, credit card use has come under scrutiny for its contribution to the financial problems experienced by many consumers during the economic downturn. People don’t plan to bury themselves in high interest debt, but it usually happens as a result of unexpected financial hardships, or to those who simply lack the discipline to keep their spending under control. For people responsible with their finances, the wise use of a credit card can actually fortify their financial position. If used properly, credit cards offer a number of important benefits that aren’t available with other forms of payment.
Building your Credit Score
Sooner or later, young adults find out that they need a strong credit score just to get along in life. In fact, a strong credit score matters more in younger generations than it did in the past. You need a good credit score to be able to rent an apartment or a house. You can’t get good rates on your auto insurance without a good credit score. Most carriers require a credit check for a cell phone plan or cable TV subscription.
Short of using a credit card, it is difficult to build a credit history, which is a key to scoring your credit. It may be the most important reason to use a credit card. People who understand that and are able to control their spending, simply use their credit cards for normal purchases and then pay their balances in full each month. Each payment goes toward building your credit history. By paying their balance in full each month, they keep their debt-to-credit limit (or credit utilization ratio) low, which is also the key to a good credit score.
Eventually, you may want to get a loan to buy a new car, or get a mortgage for a new home. Regardless of how much money you make, the lenders will want to see how responsible you are with credit. It can take a couple of years of credit card activity to build up your credit score, so there is no time like the present to get one.
Better Cash Flow Management
If you are able to look at your credit card like it is just a charge card; that is, a cash card that has to be paid in full each month, it can be a much more effective way to manage your cash flow. People who just carry cash can easily end up spending more than they intended; because there is no record of their spending other than receipts, it’s difficult to track it. As long as you use your credit card for budgeted spending, it can be a great cash management tool.
For Your Protection
Perhaps the best reason to use your credit card instead of cash or a debit card is the protection it provides against fraud while also providing purchase protection, extended warranties and return guarantees. It’s advisable not to purchase expensive items such as TVs with cash. There’s too much that can go wrong and you won’t have any protections.
Travel Security
If you like to travel, credit cards provide significant financial protection. Many credit cards offer extra travel insurance, trip cancellation coverage, lost or damaged luggage protection, roadside assistance, and medical coverage.
For Emergencies
Life happens, and it often happens at the least convenient or inopportune times. While it's always recommended that you build an emergency fund, your credit card can be your emergency fund when cash isn’t available.
Get Cash Back
Credit card issuers are getting very competitive in offering cash back rewards. These programs will either pay you cash back or earn you points redeemable in merchandise. Some cardholders can earn hundreds of dollars on cash back and other bonuses available in some programs.
You Can’t Replace Cash
If you lose your wallet you can’t replace cash. But with a simple phone call, your credit card can be replaced within a day in many cases. In addition, if your credit card is used after it's lost, your liability for unauthorized purchases it typically limited to $50 (or $0 with most cards).
Automate Your Life
You may have set up some of your accounts for automatic billing using your debit card. You can do the same thing with a credit card and avoid the danger of a checking account overdraft. You'll have all the protections that come with a credit card, and you can be earning cash back rewards too.
The Impulse Buy
OK, this may be one of the reasons why you shouldn’t carry a credit card. Impulse buys are at the root of many credit problems. However, if you are in control and come across a once-in-a-lifetime deal on something you’ve always wanted but couldn’t afford, you can put it on your credit card – with the caveat that you will divert cash flow from other non-essential budget items to pay the balance as quickly as possible.
Tips for Managing Your Credit Cards Responsibly
It’s difficult getting through life these days without a credit card. While many people simply take them for granted, others walk a daily tightrope in managing them, where one slip could suddenly send their credit situation tumbling. In either case, all it takes is one mistake to turn your financial dreams into a nightmare. Credit card mistakes usually result in higher interest charges or a lower credit score, either of which can be very costly. The problem is that many people don’t understand the magnitude of what they might think is a harmless little mistake. But when they understand the costs it should be enough to make them lose sleep.
These are five common mistakes people make with their credit cards that can and should be avoided if you want a good night’s rest:
Making Minimum Payments
This could very well be the costliest mistake you could make. This can add hundreds or even thousands of dollars of interest charges over time, and it can adversely impact your credit score. Making minimum payments on your credit card balance can explode your interest costs to nightmarish proportions to where it could take years to pay down the debt. Also, the credit bureaus don’t take too kindly to minimum payments, especially if it results in your debt-to-credit limit ratio to increase. You should always make more than the minimum payment on your credit card balance, even if you have to cut other things out of your budget.
Missing Payments
When finances get tight, people sometimes need to do some major juggling of expenses and payments to get through to the next pay day, and it is often the credit card payment that falls on the priority list. The rationale for some people is that as long as they pay it before 30 days, it won’t be reported as a late payment. While that may be true, the damage to your credit begins the moment your payment is late. That’s because the credit card issuer is likely to boost your interest rate, especially if you've had more than one late payment. In addition to a late payment fee, you may see your interest rate increase by as many as four or five points. That could lead to more problems if you find yourself having to make minimum payments as a result of the higher costs.
Dancing the Balance Transfer Shuffle
There are few things more tempting than a 0% introductory rate offer, especially if you’ve managed to rack up some high interest debt on another card. The problem is, if you are having problems paying down the debt on one card, you are very likely to continue having problems on the new card. Balance transfers can provide some temporary relief from high interest payments, however, once the introductory period expires you’re right back where you started with another high interest payment to make. You could also find yourself with too many credit cards (another mistake) which can hurt your credit score.
Balance transfers only make sense if you are able to pay off the balance during the introductory period, or at the very least, you are able to take advantage of the 0% interest to substantially pay down the debt.
Spending Beyond Your Means
The number one reason people get into trouble with their credit card debt is because they use them to buy things they can’t afford. Typically, it’s not a one-time event. More often a credit card becomes an enabler for someone who is in the constant pursuit of “more.” It may be just a hundred dollars over budget this month or the fifty next months, but eventually it adds up to hundreds or thousands of dollars that is not covered by your income. People who have trouble controlling their spending should not use credit cards. If you are disciplined and can stick to a strict spending plan, you can safely use your credit card regularly.
Never Put These on a Credit Card and Why
It’s probably happened to everybody at some point. You’re faced with a big one-time expense and you have a credit card with a zero or low balance burning a hole in your wallet. So you say, “What the heck, I’ll pay it off in a couple of months.” Or, you found the perfect car to buy and you think to yourself, “Why not pump up my rewards balance?” So you put the down payment on your credit card, which you rationalize by telling yourself you’ll pay it off before the interest charges hit. While these may seem like reasonable or opportune times to use your credit cards, you could be making a huge mistake that can cost you big time. In reality, there are some expenses or purchases that you should never put on your credit card for the simple reason that it almost always costs you much more in the long run.
Paying the Tax Man
Sometimes it may be unavoidable to pay your tax bill with credit. Sometimes you just don’t have the money. But with APRs north of 13%, you could find that tax bill ballooning with massive interest charges if you can’t pay off the debt. That’s on top of the “convenience fee” of up to 2.5% you’ll be charged for the privilege of using your credit card.
The better alternative would be to work out an installment plan with the IRS. They charge a much lower rate of interest (around 6%) and you can have the payments automatically deducted from your checking account.
Making a Down Payment – Car or Home
When you find that perfect deal on a car, you want it now. Even though you might have the down payment available in your checking account, you decide to whip out your credit card because it just seems easier, or maybe you have visions of thousands of airline miles dancing in your head. Besides, you plan to transfer the balance from your checking when you get the chance. Halt! That’s what nearly 80% of car buyers thought when they charged their down payment only to wind up keeping the balance on their credit cards. Something comes up, or you decide the monthly payments on the card aren’t so bad.
Unless you absolutely, positively plan on paying it off immediately, putting a car down payment or even a mortgage down payment on a credit card completely goes against the purpose of the down payment, which is to increase your equity in the asset. A car is a depreciating asset, so you are likely to be upside-down in your equity the minute you drive off the lot.
If you don’t have the down payment available in cash, it’s just being foolish to charge it. The car will wind up costing you much more than you anticipated, putting you deeper in a hole. Pass on the deal and wait until you can save for a down payment.
Consolidating Student Loans
Many college graduates are feeling like they’re being crushed under an avalanche of student debt and overwhelmed with managing multiple payments on multiple loans. So if they’re lucky enough to be offered a high-balance credit card, it would seem like the logical solution to simply transfer the balances to the credit card. Wrong! It really makes no sense at all, especially since there other less costly options available to anyone carrying student loan debt.
If you are carrying student loans issued through FFEL (private funding) or Federal Direct loans, such as Stafford or Perkins, you are eligible to consolidate your loans under federal guidelines that will ensure a reasonable fixed rate (no higher than 8.25%) and extended payment terms (10 to 20 years).
What Should Young Adults Look for in a Credit Card?
For people trying to decide which credit card to apply for, the good news is that there is a plethora of choices, and the bad news is there is a plethora of choices. The universe of credit cards has become so vast and varying that selecting just one can be a daunting task. Fortunately, the task is made easier with the ability to search, shop and compare on credit cards of all types including secured, balance transfer, rewards, cash back, hotel, travel, and business credit cards. Unfortunately, there is no right answer to what is the best credit card to apply for, as it depends almost solely on your specific needs and financial situation. You can quickly narrow down your choices by first assessing your reason or objective for obtaining the credit card.
You are trying to build your credit: If you have little or no credit or you’re trying to climb out from a distressed situation in which your credit was damaged, your choices will probably be limited. The good news is that there are credit card companies that offer cards to people with poor to fair credit. The bad news is that some of them can be somewhat predatory in their terms. If your intent is to use the card to build credit and pay off your balances each month (recommended), you should hold out for a card with reasonable fees. Even if the APR (interest charge) is high, you shouldn’t be affected if you don’t carry a balance. Don’t expect any bells and whistles with these cards. Consider it a stepping stone to a better card.
You have good credit but you may have to carry a balance each month: If you are applying for a card in order to make a major purchase (an appliance, a vacation, etc), and you expect to carry a balance until you can pay it down, you should obviously look for a card with the lowest APR. A 0% balance transfer offer would be ideal, but if none are forthcoming, try to keep your rate below 13%. Beware of low APR cards with high annual fees. You could consider a credit card with a cash back rewards program that can be used to offset a part of your fees and interest charges, however, they tend to come with high annual fees or higher than average APRs.
You have good to excellent credit and intend to pay off your balance each month: You will have the widest selection of cards to choose from, but your best card has no annual fee. You should always try to find a card with a low APR in case you're caught with a balance in any given month, but a low APR and a zero annual fee don’t usually come together. You would be a good candidate for a cash back rewards card that will pay you cash for your purchases, but they tend to charge higher annual fees.
You have very good to excellent credit and you want to earn maximum cash back: This may be the main reason why most people even consider getting a new credit card, because a good cash back rewards program can earn hundreds of dollars a year just for making your regular purchases. They’re best for people who don’t need the credit and just want the cash. The best cash back card for you depends on your purchasing needs and spending habits. For instance, If you want to save money for gas purchases, you will want to get a card that pays 2% to 3% on all gas purchases. Some cash back programs pay a bonus of up to 5% on seasonal purchases. It’s not uncommon for a regular card user to be able to accumulate four or five hundred dollars a year just for using their cash back card on budgeted monthly purchases.
What Credit Limit Can You Expect as a Young Adult?
Your credit history, your credit score, and your income are the primary determinants of your credit limit. If this is your first credit card and your credit history is limited, you could expect a credit limit in the $500 to $1,000 range, if you have a good income. If you have some credit history and you have a good income, you might see something as high as $2,500. Many credit card issuers will automatically increase your credit limit after you have demonstrated a period of on time payments. If you haven’t been offered a credit limit increase, you could request one from the issuer. Again, they will want to see at least a one-year period of on time payments.
Tips on Applying for a Credit Card
It has never been easier to apply for a new credit card, which is all the more reason to make sure that you don’t leap before you look carefully at all the factors that will be considered. If you apply, and then are denied credit, you could set yourself back and make it more difficult to obtain credit in the future. The key before applying for credit is to know your credit history and current situation. This requires some research on your part, but fortunately most of what you have to know is available right on your credit report.
You Need to Know the Score
Your credit score is the single biggest factor the credit card companies consider when reviewing your application. If you have excellent credit you can apply for the best cards with the best terms. Even then, you should know your score exactly, because the difference of 25 points could mean the difference of 2 to 3 percentage points in the APR you will pay. More than just your credit score, you need to know you FICO score. This is the official score most credit card companies use and it is different than the scores you’ll see on your credit reports.
Each of the three major credit bureaus – TransUnion, Experian and Equifax use a different score based on their own formulas and criteria. While they may help you to determine the relative strength of your credit, they are not the score the credit card companies consider. Go to myFICO.com to order your FICO score, it’s not free, but at least you’ll see what the credit card companies see.
Clean up Your Credit Report
You can obtain free copies of your credit report from each of the credit bureaus. By law, each is required to provide you one free report each year. Your best course is to order one from each at three different times during the year so you can check them for changes in your credit history. Check your credit report for errors and omissions. It’s not uncommon for the credit bureaus to report erroneous information or omit payments. If you notify them, they are required to correct errors and omissions quickly. It is imperative that you do this before applying for a credit card.
Shop and Compare
You may have seen by now that the Internet is loaded with credit card sites. This is a huge advantage when you consider that in the “old” days all we had was a brochure from our bank or whatever offers showed up in our mail box. Now you can shop and compare from among dozens of cards by just clicking your mouse. These sites enable you to compare any number of different factors such as rewards programs, credit rating requirements, fees, and interest rates. This allows you to quickly narrow down your choices to the cards that best match your needs and profile.
Apply Sparingly
If you have done everything possible to research and clean up your credit situation, and you have narrowed down your choices to one or two cards, you can access the application through a link provided on the credit card site. You should only apply for one card at a time. Generally, the online application is brief, including basic information such as name, address, phone, social security number, sources of income and employment. With many cards you will receive a response within minutes. If you don’t receive an approval quickly, it means your credit requires additional evaluation. If that happens, don’t panic, you could still receive approval after a couple of days.
If you are denied, be very careful about submitting additional applications. Each time you submit a credit card application it hurts your credit score temporarily. So with each subsequent application you reduce your chances of obtaining credit with favorable terms. If you can, wait a few months to apply again. In the meantime, continue to work on your credit situation. When you are denied you will receive a letter stating the specific reasons for the declination. Use that to your advantage to fix the problem.
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