In the US, credit cards might be as American as apple pie.
According to Shift Process, 1.89 billion was found in the US in 2019 — more than half of the 2.8 billion cards in circulation. Meanwhile, 2020 statistics from Forbes shows that 79% of Americans owned at least one credit card, making those without one a considerable minority.
None of this is to say one needs a credit card to be a functioning member of US society. After all, credit is easily the backbone of US debt, which, according to The Balance, reached $1 trillion in 2019. In Virginia alone, the average debt is $5,992.
Still, there are some things that could incentivize getting a credit card. Building up a good credit score early will signal to banks that one can be relied upon when it comes to loans — something handy for renting a house or purchasing a car, to name a few examples. Developing this as a student means getting approved sooner in life.
According to Forbes, credit cards also come with the added benefit of protecting against fraud, as it’s easier for banks to halt a purchase that didn’t require the immediate transfer of actual funds. They can also provide a consumer with emergency funds without cutting into one’s savings.
Credit cards can also outshine debit cards with their reward programs, a benefit that seems to be the leading cause for their popularity — per Statistica, the majority of survey respondents from 2019 got a credit card due to the attached reward earnings.
But how does one start their credit score journey? Here are a few things to know:
A few technicalities
A consumer may be as young as 18 years old to get approved for a credit card but would need to have some income source — or a co-signer — if under the age of 21, according to WTOP News.
When applying, one should pay attention to the annual percentage rates (ARP), fees and policies attached to the card. ARP is best seen as the interest that a lender can set on loans. Fees differ in that they’re permanent regardless of when the bill is paid off. According to CNBC, these include annual and late fees.
Generally, the aim of any credit card holder is to improve their score for better loan limits in the future. Fair Isaac Co. (FICO) scores in the US are basically analogous to credit scores and one of the most commonly used measures.
According to Investopedia, FICO scores range from 300 to 850 and can be broken down into five main components: payment history, amount owed, length of credit history, new credit and credit mix — or the amount of diversity in one’s type of credit, ranging from car to loans to mortage.
Building credit as a student
Many younger consumers should expect rejection when applying for the typical credit card, though this isn’t to say credit cards have no presence on college campuses. In 2018, 57% of undergraduates had one, as reported by WalletHub.
According to NerdWallet, students have the option of getting a “student” credit card or even a “secured” one, which requires a collateral cash deposit in the case the applicant cannot pay off their debt. Meanwhile, student cards come with less strict scores or income requirements but offer lower credit limits with little added benefit.
If a student is rejected, there are still other options. For instance, young consumers can find a co-signer or become an “authorized user,” which is where the user’s credit card is tied to someone else’s credit.
Otherwise, one can use other services to record things like rent and utility payments in lieu of a credit score. Even student loans are a form of credit history and can be found at Annual Credit Report.com if needed.
What to be careful for
One should understand that signing up for a credit card also means signing up for extra. Not this can result in a worsened understanding score and the potential for considerable debt.
While cards usually come with a grace period — that is, a time in which interest won’t accumulate on credit purchases — users should get in the habit of paying off their monthly bills on time to limit the effect of any interest and build up their score.
Ignoring interest can worsen with time, as it has the capacity to compound. On top of that, ARP can also grow if the user’s reputation for paying off bills is bad.
Meanwhile, as reported by Credit Card Insider, things to avoid also include maxing out a credit card and applying for new credit soon after getting approved. Not only does this look poorly to a bank, but it can accumulate debt that’s hard to pay in the future. Instead, WTOP News recommends using less than 30% of one’s credit limit.
Most important, however, is consistency. Not only will years of good credit be notable to loaners, but it’ll also attract the attention of employers and renters. Starting now can open doors to a brighter future.
Contact Filip at email@example.com. He is a media arts and design and international affairs major.