What Are Good Credit Card Goals for Recent Graduates?
Credit cards are powerful tools. They offer flexibility and protections that can be handy as new grads manage the expenses of adulthood. Recent college graduates using credit cards should focus on one main goal: learning to use credit cards responsibly. Here’s how to begin:
Work on building your credit history. Good credit can help if you hope to buy a home or start a business. You can use a credit card to build a strong credit history.
A credit card is a useful tool for building credit because interest is optional, says John Ulzheimer, a credit expert who has worked at credit bureau Equifax and credit-scoring company FICO. If you pay your balance in full each month, you won’t have to cover any interest charges – or carry debt.
And even if you already have some credit history, credit cards can expand it. If you have student loans, for instance, credit cards could diversify your credit profile, says Stefanie O’Connell, a millennial personal finance expert and the author of “The Broke and Beautiful Life.”
Try using a credit card to manage your budget. Spending more than you can pay off each statement period is not a good idea, but a credit card can stretch your buying power.
Say you’re waiting on your first paycheck but need to buy a few pieces for your work wardrobe; a credit card can help. You could buy what you need now, then pay it off when your paycheck arrives. If you need more time to pay off a balance, a credit card with a 0% introductory rate could give you about 12 to 18 months interest-free.
Choose credit cards instead of debit cards. Credit cards are a safer choice than debit cards for everyday purchases. Each time you use your debit card, you may be exposed to fraud.
Your debit card information can be stolen and used to duplicate your card or make purchases online. The money for those purchases comes straight from your bank account.
Credit cards aren’t immune to fraud, but they offer much more protection than debit cards. You can resolve fraudulent purchases before your statement period ends rather than the charges coming directly out of your bank account. And you’re liable for no more than $50 in charges.
Upgrade to a credit card with purchase protection. Whether you’re setting up a new apartment or investing in a mobile device, purchase protection benefits that come with your credit card can cover theft or accidental damage. For instance, your credit card might extend a manufacturer’s warranty or refund the cost of lost or stolen items.
“New grads are going to start making more money and buying more expensive things. It’s time to convert from cash, debit cards and prepaid debit cards to legitimate credit cards,” Ulzheimer says.
What Kind of Cards Should Recent College Graduates Get?
New grads will find that a no-frills credit card can meet their needs for now.
“Recent grads should consider starting with a basic, no-fee credit card,” O’Connell says.
Ditch student, starter, secured or prepaid cards, and move to an unsecured card, which doesn’t require a deposit to open the account, Ulzheimer says. Cash back cards can be a good fit for recent graduates because the value of rewards is easy to understand, he adds.
Still, O’Connell says a secured card could be a good choice for graduates who can’t otherwise qualify for a credit card. You can use it to establish a solid credit history, then progress to an unsecured card.
Find a card that offers rewards, benefits, consumer protections and flexibility, with no or low expenses. That way, you get the perks of a credit card without taking on major costs.
Do not let rewards and sign-up bonuses distract you, O’Connell warns. They can be helpful, but the practical aspects of credit cards are more important at this life stage. For instance, compare interest rates on cards in case you have to carry a balance.
To this advice, she adds: “Look for a card that doesn’t have an annual fee. And if you plan to travel after graduation, try to find a card that doesn’t have foreign transaction fees.”
Recent college graduates should seek these credit card features, listed in order of importance:
No annual fee. The annual fee is the most important fee to consider when choosing credit cards as a new graduate. Some credit cards with annual fees are worth using, but don’t get one unless you know the card offers enough value to offset the cost. A card with no annual fee is a safer choice, especially if you’re on a limited income and budget.
Limited fees overall. In addition to the annual fee, credit card issuers charge other fees that must not be overlooked. A card that waives foreign transaction fees can save you about 3% on purchases you make when traveling abroad. And if you choose a card that waives some or all late fees, you will have some flexibility if you mistakenly miss a payment deadline.
Low APR. Spend within your means, and pay your card balance in full each statement period. If you need to carry a balance, limit how much interest you pay.
A card with a 0% introductory APR can save money on interest for a certain time period, typically 12 to 18 months. Or a card with a low ongoing APR – generally about 15% or lower – can keep interest low.
Consumer protections. By default, credit cards offer a level of consumer protection with their limited fraud liability.
Some cards take this a step further with features such as extended warranty coverage and purchase protection. The former prolongs the original manufacturer’s warranty on certain products, and the latter replaces, repairs or provides refunds for items that are lost, stolen or damaged within a certain period. You only need to pay with your credit card to receive these benefits.
Rewards. If you’re using a credit card, you might as well earn rewards from it. Although certainly not the most important credit card features for new graduates, rewards can give you kickbacks with every purchase. Even a card that earns 1% cash back on all purchases could accrue useful savings.
Credit limit. Ulzheimer advises shopping for a credit card that has a large credit limit. This might seem foolish if you’re watching your budget, but he says a high ceiling is not about room for more spending. Rather, a large credit limit, if you can get approved for one, may help your credit score by giving you some wiggle room on your credit utilization ratio.
That’s the size of your credit limit compared with how much credit you’re using, expressed as a percentage. A large credit limit can keep your credit utilization lower, provided you don’t max out your card.
How Can Recent Graduates Use Credit Cards Responsibly?
Choosing a credit card is one matter, but actually using it is another. Now’s your time to shine and show potential creditors how responsible you can be. It’s also a good time to learn how credit cards work and how to tap their best features.
If you tend to overspend, credit cards may not be right for you. Stick with cash, but try using a credit card for a couple of recurring bills you’ll pay off each month, O’Connell says.
“For example, you can set yourself up to pay your Netflix and utility bills with your credit card automatically each month. Then have your credit card automatically withdraw funds from your checking account each month to pay the bill in full,” she says.
Even if you can’t pay your bills in full, pay them on time. On-time payments are crucial, as payment history makes up 35% of your FICO credit score – more than any other factor. Make at least the minimum payment on or before the due date.
Know your credit card features so you can confidently use them. If your card earns rewards, for instance, how much are earning? Which card user benefits do you get? For example, if your card offers an auto rental collision damage waiver, you can turn down extra coverage at the rental counter.
Avoid “surprise” fees and penalties, such as a 3% foreign transaction fee, by checking your card’s disclosure statement.
Not charging more than you can afford to pay off each statement period also is key. Do that, and you will avoid paying interest and going into credit card debt.
Strive to keep your credit utilization ratio at 30% or lower. That means you’re using no more than 30% of your available credit at any given time.
“Think about you card as an alternative to cash rather than a supplement to your income,” Ulzheimer says.