Many Americans are students when they get their first credit card or become an authorized user on a parents' card. The average age people say they first got access to credit is at 20 years old, according to a survey from The Ascent, a financial product review site from The Motley Fool, which polled 1,001 credit card users.
And building credit is the No. 1 reason young adults give for opening a credit card, according to the Majoring in Money 2019 report from Sallie Mae, which polled 2,419 people ages 18-29. That's wise, since a solid credit history helps you borrow for larger purchases, like your first vehicle or home, and get a lender's best rate on those loans.
But how do you choose a good first card, one that can help you build credit and become a responsible cardholder? Here are four features to consider.
Not all cards charge annual fees. For the ones that do, fees can range anywhere from $49 to $550, according to Creditcardinsider.com. Credit card issuers charge this fee once per year to cover any benefits that come with your credit card, such as travel or shopping perks. Cards with more benefits will often charge higher fees.
Experts generally recommend you avoid cards with annual fees, unless you can pay off your balance in full every month and will make the most of the perks you're paying for. Qualifying for these kinds of cards can be difficult for new borrowers, anyway.
Ideally, you'll pay off your balance in full and on time each month. But if you can't, a higher interest rate will add to your total balance and can make it more difficult for you to pay off your debt.
The average interest rate for credit cards geared towards students is 19.80%, although they range from 13.99% to 22.62%, according to ValuePenguin.
"When you're selecting a card, you want to consider the interest rate and think about whether you intend to carry a balance," says Neal Solomon, managing director of WealthPro LLC in Gloversville, New York, noting that "for more established borrowers who are able to pay off their balance in full, the rate might not matter as much." Overall, he says, "you have to think about the features you plan to use."
Some credit card issuers, like Discover, offer cash-back incentives geared towards students, like a $20 credit for every year they earn a 3.0 GPA or higher. Other cards, like Capital One's My Journey card, offer rewards to students for making payments on time. On that card, every on-time payment boosts your cash back, up to a maximum 1.25% for that month.
Solomon says that when you're weighing the pros and cons of a particular card, you should think about your spending habits and what rewards a certain credit card may be able to offer you.
If you're excited about seeing the world, for instance, you may want to consider a credit card that rewards you for booking air and hotel travel, such as the Bank of America Travel Rewards Credit Card for Students. You can earn 1.5 points per dollar on all purchases, and points are worth one cent each as statement credits towards travel reservations.
"When you start out, the best feature to look for is any kind of cash-back incentive," says Erika Safran, a certified financial planner with Safran Wealth Advisors in New York City. "If you can earn some kind of percentage on what you're already spending money on, it's probably the most efficient feature."
- Solomon and Safran both agree that you shouldn't be so quick to close your first credit card, even if you don't use it. Keeping that line of credit open extends the length of your credit history and shows future lenders that you've been a responsible borrower.
- Pay off your card in full and on time each month to avoid paying interest. Carrying a balance doesn't help you build credit, and it can cost you money.
- Credit experts suggest you aim to use only 30% or less of your available credit. This shows future lenders that you know how to manage your finances and can help you build or maintain a higher credit score.
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