If you’re a recent college graduate, you might be looking for a credit card to add to your wallet.
It’s a good way to build your credit history as you enter the phase of your life where you’ll be out on your own. Down the road you’ll need good credit to get approved for a mortgage or car loan with an attractive interest rate. But even before that, a prospective employer or landlord might pull your credit history to size up your financial responsibility.
“Not having a credit card is probably one of the worst mistakes you can make financially,” says Kevin Yuann, credit cards director at NerdWallet. If you have no credit history, a lender has no information by which to evaluate you. Plus, it’s in your interest to develop a credit history sooner than later; The longer you have a credit card and demonstrate you can use it properly, the better your credit score will be.
Yet, it’s increasingly likely that you’re graduating college and entering the real world without a credit card. Some 63% of Millennials (ages 18 to 29) don’t have a credit card, according to a recent survey by Bankrate. Why? “People in their 20s lived through one of the worst financial disasters and saw their parents get burned by financial institutions,” says Yuann, adding that the experience bred a general distrust of the entire industry. Plus, in 2009, Congress made it harder for those under 21 to get a credit card of their own with the CARD Act.
Moreover, with all the preaching these days about the importance of saving for retirement and curbing unnecessary spending, Millennials are rightfully leery of racking up credit card debt, preferring to use debit cards that draw money directly from their bank accounts. Still, having a credit card in your wallet, in addition to building your credit score, can be an added convenience and perhaps even a way to rack up some cash back or travel rewards.
“It’s like a power tool,” says Bill Pratt, author of The Graduate’s Guide to Life and Money. “It’s very powerful and is going to make your life better, but first you need to learn how to use it and get together your safety equipment.”
The instructions are straightforward: Always pay your entire balance, in full, and don’t be late. Set up auto pay to help you do this.
“I think credit cards are absolutely necessary,” says Pratt, “but if you use it wrongly it can hurt your credit instead of build it and set you back financially, especially if you have student loans already.”
What you want to stay away from is making late payments and missing payments altogether, both of which will do serious damage to your credit score. You also want to pay the entire balance (not just the minimum amount due), to avoid getting stung by the type of double-digit interest rates that often come along with a first credit card. Another pro tip: Don’t spend more than 30% of your credit limit. This means if your initial credit limit is $1000, don’t put more than $300 on the card for the month.
If and when you decide to get a credit card, the first challenge is getting approved. You may find your options limited because you have a limited or nonexistent credit history.
“It’s like getting a good job: to get a good job, you need experience — but to get experience, you need a job,” says Charles Tran, founder of CreditDonkey.com.
It’s a good idea to check your three credit reports (one from each of the big three bureaus, Experian, Equifax and TransUnion) if you’ve never done it before. They are free once per year at AnnualCreditReport.com.
You are checking to see what credit history you have, if any. Perhaps you’ll find the bank account your parents set up for you when you were a teenager or a few student loans. Perhaps there’s not much at all.
You can then check your credit score for free on sites like CreditKarma.com, CreditSesame.com and Credit.com. Your credit score, which is calculated from these reports, will give you an idea of what type of credit card you can qualify for. FICO scores range from 300 to 850, with anything above 780 considered very good and anything below 600 considered fair to bad.
If you have good credit, look for a rewards card, preferably with cash-back. When applying for one, it is also helpful to show you’re gainfully employed and have some income. (Tip: if you’re working for a year or two before graduate school, get a card now before you return to student status.) If your credit history is limited, there are a few more plain vanilla options geared toward people with fair to average credit. If your credit reports are all but blank, you might try an secured card. This means you’d deposit your own money in advance–say $300 or $500–which acts as your spending limit. The main purpose of this exercise is to build credit history. After six months, says Pratt, try for a regular credit card.
Above all else, you want to look for an option without an annual fee. This is the card you’ll hopefully be carrying for the rest of your life, says Yuann, since it’s better for your credit score to have accounts for a long time. That means even if you upgrade down the road, don’t cancel an existing card.
With all this in mind, here are several credit card recommendations from experts surveyed by Forbes, all geared toward recent college graduates and without an annual fee: