Ted Rossman has seven years of experience in the credit card and personal finance industries as a member of the award-winning communications department at CreditCards.com and its sister sites The Points Guy and Bankrate.
Like a lot of young adults, my youngest brother had trouble
signing up for his first credit card. He tried to get one last year at age 25,
but was rejected because he lacked a credit history. He was stunned: he paid
his rent, utility and other bills on time every month. What did the credit card
company mean that he didn’t have a credit history?
He learned that none of that stuff builds credit and the
only credit card he qualified for was a secured card with a $200 limit. That
was a big disappointment, and very inconvenient, because he kept bumping
against the $200 limit. It was especially impractical for more expensive things
like airline tickets, which would normally be great to put on a credit card to
get the rewards (as long as you can pay the bill in full at the end of the
After several months with the secured card, he was finally
approved for an upgrade to a “real” (unsecured) credit card with a much higher
limit, but this is a cautionary tale that surely speaks to many young adults.
How should younger millennials and Gen Z build credit?
Parents can be a big help here, but they need to realize
that the rules have changed considerably since their teens and 20s. In the ’80s, ’90s and early 2000s, it was much easier to get your first credit card.
Issuers marketed extensively to college students. I’ve talked with lots of Gen
Xers and older millennials who signed up for their first credit card on campus,
often in exchange for a free T-shirt, towel or similar low-value marketing
gimmick. These weren’t today’s 60,000-point sign-up bonuses worth hundreds of
dollars in cash or free travel, that’s for sure!
The CARD Act, which was signed into law in 2009, pushed
credit card marketers off-campus and raised the minimum age for credit
cardholders to 21 unless they can prove sufficient income. This is mostly a
good thing that is preventing a lot of young adults from getting into trouble
with credit, but the unintended consequence is that many responsible people in
their early and mid-20s are having trouble establishing a credit history.
Here’s where parents come in: I suggest adding
your child as an authorized user on one of your credit cards starting
around age 18. By doing this, your child will begin establishing a credit
history and will benefit from your positive track record of on-time payments.
Note that this only works if you maintain good habits with your own credit. If you
pay late or rack up too much debt, this strategy will backfire and you’ll hurt
your child’s credit as well as your own.
If you go ahead with the authorized user approach and trust
your child with money, you can give her the card and let her buy things with
it. It’s possible to set spending limits with some
card issuers. If you’re not comfortable with that, you can still add her as
an authorized user to let her benefit from your positive payment habits, but
stash the card away somewhere so she can’t use it.
There are other options, too
In hindsight, my brother probably waited too long to get the
ball rolling. His intentions were good (he was afraid of getting into debt and
he was able to make do with a debit card, Venmo, PayPal and so on), but he
could have at least gotten started with the secured card at age 21 or 22 and
that would have accelerated the process by a few years.
Another idea is to make a store credit card your first
credit card. These cards are typically much easier to get, but since their
average interest rate is nearly
nine percentage points higher than the national average, it’s even more
important than usual to pay the bill in full every month. If you can do that
and want to sign up for a store card, get one that can be used anywhere (store
cards are often only accepted by the issuing merchant).
The Gap Visa Card
is a compelling example. You’ll earn 5 points per dollar spent at Gap and
affiliated brands such as Old Navy, Banana Republic and Athleta and 1 point
per dollar elsewhere. You’ll get a $5 reward for every 500 points you earn. The
card also offers a sign-up bonus (20 percent off your first purchase plus free
shipping, and ongoing benefits such as 10 percent off every time you shop at Gap and
Gap Factory stores). Once you’ve shown that you can manage credit responsibly,
you’ll be able to qualify for cards with even more lucrative sign-up bonuses
and rewards programs.