When the class of 2019 hits the workforce, our interest rates on mortgages and car loans, as well as rent and employment opportunities, will largely hinge on our FICO credit scores, and having the ability to obtain a loan will significantly impact your standard of living throughout your life. If a loan requires credit, how can you prove creditworthiness? The easiest way to start building your credit is by obtaining a credit card. If you’re at least 18 years old, credit cards are the most convenient way to build a credit history, as you only need to apply once for an unlimited number of loans that have no interest if paid off in full every month. However, any financial mistakes involving credit cards will result in high fees, a pile of debt, and a dreaded poor credit score. Following these tips should help you get on your way after graduation.
When applying for a credit card, it’s important to select a card that will virtually guarantee approval, as every credit card application puts a hard inquiry, or credit history check for credit worthiness, on your credit report, reducing your FICO credit score. Your most likely options if you have no credit are to have a family member of worthy credit refer you for a student card (My dad referred me for Discover IT Student Cash Back) to connect your identity to an already creditworthy customer. Additionally, referrals often come with signup bonuses, earning you and/or the referrer some extra cash (Discover’s was $50 each!). If you desire a card from a different bank than your parents, you may be able to obtain a card requiring a credit history if your parents cosign, putting your credit responsibility on both you and your parents. If your parents have poor credit, a secured credit card may be your best option. Secured credit cards require a security deposit equal to the credit limit (the amount in loans you can place on your card), guaranteeing that your credit can be paid off. While most credit cards come with perks, cash back cards rather than points cards are preferable unless you fly or book hotels on a frequent basis. If you’re planning on studying abroad, find a card with no foreign transaction fees, preferably a VISA or MasterCard, which have more global acceptance than Discover or American Express. Watch out for annual fees though, any extra perks from a card with an annual fee will not be worth it unless you spend thousands per month on the card.
Now for the fine print. A credit card will earn rewards, but the rewards are pointless if you fail to pay off the card in full each month. If you carry a balance from one month to the next, the high APR (interest rate), up to the mid 20%’s, will cost you far more than any rewards you may earn. The prognosis is even worse if you miss a minimum payment, with fees of approximately $37, not to mention the major hit to your credit score. If all you have in your wallet is your credit card, avoid the ATM at all costs. Withdrawing money from an ATM with a credit card is a loan called a cash advance, and it carries a hefty fee of about $10 in addition to any ATM fees. In addition, a cash advance starts accruing interest from the moment it’s withdrawn.
Ultimately, avoiding the fees and building your credit is pretty simple: choose a card that’s right for you, don’t put more on the card than you have in your bank account, pay on time, every time, in full, and leave cash withdrawals for your debit card. Rewards await, from both your credit card company and the low-interest mortgages, car loans, and stellar employment opportunities from an excellent credit score. Good luck Class of 2019!
For information on specific credit cards and comparisons, I recommend researching on nerdwallet.com and The Credit Shifu on YouTube. Both sources heavily impacted my credit card decision.