March 4, 2019
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Getting a credit card is a great way to start building credit, which is crucial for several important life decisions, including securing loans and getting the best insurance rates. Despite this fact, many Millennials are still foregoing credit cards all together—approximately 31% have never applied for a credit card. Additionally, according to a recent study done by NerdWallet, Millennials have the lowest average credit score—28.1% have scores below 579—and the shortest credit history of all age groups. What you have to realize is that not using credit is as bad as having bad credit. Banks want you to use credit, because that’s how they make money.
Here are a few of the things that Millennials should know about credit cards so they can make smart decisions and build healthy credit:
Your Credit Score is Important, but it’s Not Everything
Keep in mind that your credit score rewards you for behaviors that the banks want you to engage in. If you are using credit only to build your credit, it is best to use it only for small purchases and pay it off every month. It’s important to use your first credit card wisely because it will likely have a high interest rate. Once you establish some credit keep in mind that your high credit score doesn’t necessarily mean you have a healthy financial situation—a good credit score can never make you rich, it can only help you get into debt. The best indication of a healthy financial situation is having the ability to save and having money in the bank, which isn’t a factor considered on your credit score, because it’s a behavior that mostly benefits you.
Don’t Apply for the Wrong Credit Cards
One of the most important discoveries made by the NerdWallet study was that Millennials are often applying for the wrong types of credit cards. Many Millennials with low credit scores are actively seeking new credit cards, but are often rejected by issuers because their credit score is not within the appropriate range for approval. Rejections can damage a person’s low credit score further, as each denied application elicits a hard inquiry on their credit report. The more inquiries a consumer has, the riskier they appear to lenders.
To avoid rejections and inquiries, Millennials need to make sure that they are applying for credit cards within their credit score range. Look for secured or student cards, as these types of cards are designed for people with low credit scores.
Avoid Late Payments
Failing to pay your bills on time is a big credit card misstep that many people often make. It may not seem like a big deal, but when you pay your credit card bills late, credit card companies may penalize you with two surcharges on one delinquency. These can come in the form of a late fee and a penalty rate, which is an interest increase that can quickly raise your APR to incredibly high rates.
For Millennials with bad credit, it’s important to be aware that a large portion of your credit score (35 percent) comes from your history of making on-time payments. A good tip for making sure you make payments on-time is to set an alert—whether it’s a text, email or calendar reminder—so that you’ll never miss another deadline again. Over time, the negative marks on your credit report from late payments will be eroded by the positive information you create by making payments on-time.
Fixed Rates Aren’t Really Fixed
Many Millennials are quick to believe credit card advertisements that boast low, fixed rates. But the reality is that credit card issuers can raise your APR whenever they want. Although this information isn’t a secret, it’s often hidden so deeply in the fine print of your agreement that card companies think that you’ll miss it. Knowing this, it’s important that Millennials understand the terms of their agreement before committing to a card in order to avoid surprises down the line. And once you do sign on to a card, be on the look out for notices about a raise in APR, so that you’re able to prepare.
Millennials can avoid many of the pitfalls of applying and using a credit card by doing enough research in advance. Picking the right credit card and managing it responsibly will help you build a healthy credit score in the long run. Additionally, always remember to only use credit to supplement your finances not as the basis of your finances, because the only way to build wealth is by having money in the bank.