June 24, 2016 – By Kelsey Cruz
If you’re reading this article, you’re pretty smart because a) you just graduated college and b) you’re trying to find a credit card that will simultaneously work with and for you. You need credit to get a car or house, and the more attractive your credit score and history, the lower your interest rates will be. But if you don’t have credit—and you may not because you’re young and your parents didn’t want you to charge beer to a credit card for four years—you need to build some.
“No matter what your post-college plans entail, proper money management is necessary to live a financially responsible and comfortable life,” says Katie Ross of American Consumer Credit Counseling. “Your credit history tells creditors and others how well you’ve managed your financial obligations. It’s a measure of how responsible you are.”
However, in order to build credit and credit history, you need a credit card. (You can also get a retail credit card or ask to become an authorized user on someone else’s credit card, but getting your own is the easiest and one of those things that says “I’m an adult now!”.) And since you’re just starting out on your financial journey, it’s important to learn some lingo and terms before applying.
I can’t talk about credit cards without mentioning the importance of knowing and maintaining a good credit score. According to Credit Karma, “A credit score is a three digit number calculated from your data-rich credit report and is one factor used by lenders to determine your creditworthiness for a mortgage, loan or credit card. Your score can affect whether or not you are approved as well as what interest rate you are charged.”
Pro tip: find out what your credit score is prior to applying for a credit card (a good score is 720 or higher) so you can narrow down your search and increase your chances of being approved. Every time you apply for a credit card, they do a hard pull of your credit info, which negatively affects your credit score. Because of that, you should only apply if you want the card, are going to keep it for years and years, and are confident that you will be approved.
You can get your credit score free from Credit Karma or Credit.com. (You’ve probably seen a commercial for at least one of them.) It’s also smart to look at your credit reports—which is how your credit score is calculated—so you can get a detailed look at how it all breaks down. The three main reports are Experian, Equifax, and TransUnion, and you can view them for free annually at AnnualCreditReport.com.
When it comes to finding the right credit card for you, try to find one without annual fees. Credit cards don’t need to charge annual fees to make money – they already make money by charging retailers a fee for every transaction (which is why they are free). “If there are annual fees, you are, in essence, paying for the privilege to use the credit card,” explains Sean Stein Smith, CPA, member of the AICPA’s National CPA Financial Literacy Commission. “With so many credit cards available that do not have annual fees, the question really is why would you pay to use something that you can use for free?” However, cards that do have annual fees tend to have better rewards. They also usually require applicants to have high credit scores.
Because of sneaky interest rates, it is so imperative to research, shop around, and read the fine print when it comes to finding a great credit card. No matter how financially sound or how confident you are now about paying off the monthly bill, there may be a time – job loss, medical emergency, or spur of the moment travel – that will prevent you from paying it off in full. And when that happens, expect to pay for it – literally and figuratively. “While many cards offer 0% APR up front, or other introductory rates for new card members, it is always important to research what the rates are after the introductory period,” says Smith. “Remember, these interest rates are the rates you will be paying on the balance you owe, every month, if you are not paying off your card in full.”
Some credit cards have a tiered structure – they’ll start the card off with a $500 limit, for example, and increase the credit limit after a series of on-time payments. Because of that structure, many people (cough, students, cough) get excited and caught up in how much and how quickly their money line increases. And while the offer is usually an indication of good credit management, it is always important to remember that higher limits can encourage users to put more on their card than they can afford, resulting in higher amounts to be paid back with interest, says Smith.
Now that you know some financial lingo, let’s talk about some cards that are perfect for graduates.
If you have good credit, get the Citi Double Cash Card so you can see double: you’ll earn one percent cashback on every purchase that you make with this card and another one percent back when you pay your bill on time. And while some other cards offer better rewards on things like gas and groceries, this credit card boasts the highest rewards rate on each purchase you make. What’s more, it has no annual fees. For people with good credit, the Capital One Quicksilver Cash Rewards card is another great option with no annual fees. With this card, you can earn unlimited 1.5% cash back on every purchase every day in addition to an $100 initial bonus for spending $500 in the first three months.
And if you have so-so credit, try Discover It for Students Card, where you’ll receive 1% cashback on all purchases. The card also has no annual fees, and at the end of the first year, all the cash back you’ve earned on your student card will be matched automatically. And if you’re still in school, you can earn $20 cash back each school year your GPA is 3.0 or higher. BarclayCard Rewards is another great option for people with less than stellar credit.
But if you have poor or no credit, get a secured credit card because it requires you to deposit money into it to have funds. Remember when we discussed credit scores earlier? Yeah, that MAJORLY comes into play with credit cards and if you have a low credit score (less than 629) you need to prove yourself to the credit card company. Using a secured credit card allows you to build trust with the credit card company and help them see that you have money and will maintain payments. If you use a secured card responsibly, you will be able to get an unsecured card later down the line. Capital One Secured MasterCard and Journey Student Rewards from Capital One are great both choices for people building or rebuilding credit. They don’t have annual fees and they both provide unlimited access to your credit score and ways to help you monitor your credit profile with CreditWise.
For more credit card comparison and analysis, check out Credit Karma and CreditCards.com, suggests Tracie Miller-Nobles, CPA, member of the AICPA’s National CPA Financial Literacy Commission. They compare interest rates, annual fees, and other key factors so you can find the credit card that best matches you and your lifestyle. And since they’re not sponsored by a specific credit card company, you can shop around without feeling pushed in a specific direction. (Since there is no such thing as a free lunch, they do have affiliate deals with these companies and receive a kickback if you click their links.)
If you’re not too thrilled with your current credit score (remember, 720+ is considered good credit), there are some things you can do. Here are four ways to build credit and improve your credit score:
- Pay Your Bills On Time
Whether it’s your credit card bill or your cable bill, pay your bills on time so you can show the credit card company that you are financially responsible. And pay them off directly through your bank account (i.e. money you actually have) instead of moving the debt around by paying one credit card off with another credit card.
- Pay The Full Amount Each Month
To avoid paying high interest rates, try paying the balance in full—or at least half of it—each month. And if your bill is super high consistently each month then you need to look at your finances and cut back. You may be living well beyond your means. Although it’s best to pay off your credit card bill in full each month, you and I both know that doesn’t always happen. Don’t be duped by the option of only paying the minimum payment. Sure, it may be tempting to only pay $25 per month, but not only will you be accruing more and more debt that will be tough to get out from underneath, but paying only the minimum payment mostly just covers the interest on the principal balance instead of the actual principal balance.
- Watch Your Money
The biggest problem with having a credit card—especially your first one—is that it can feel like you have free money. You always feel like you can ball out and buy what you want, regardless of when payday falls. But spending beyond your means can haunt you. A good credit score can easily be screwed up—it can honestly only take a few days! But a bad credit score takes so long to improve. Watch your money, spend wisely, avoid overdraft fees, and don’t bounce checks.
- Don’t Make Big Purchases
Believe me, you have all the time in the world to buy a car or house so you don’t have to do it now. Enjoy being 22, having good skin, and being financially sound. But since big purchases also include concert tickets, the latest iPhone, or a weekend getaway to the beach, make sure you’re smart about what you put on your card. You don’t need to max it out to improve your credit score. “Don’t fall for the misconception that you have to make big purchases to build your credit,” says Ross. “The key to establishing good credit is to make your payments on time and if possible pay more than the minimum. Payments account for 35 percent of your score. Maintain a good credit utilization ratio and keep your balances as low as possible. This can account for thirty percent of your score.”
Applying and getting approved for your first credit card is very exciting. By shopping around and finding the best card that works for you and your lifestyle, maintaining healthy spending habits, and paying off the bill each month, you’ll be astonished at how good your credit score can be and how much you will be able to afford post-college and beyond.