Choosing a credit card
Question: I am a graduate student in my mid-20s who has never had a credit card. While I have been able to get by without one, I have finally reached a stage in my personal and professional life where not having one has become a real inconvenience (when trying to reserve a rental car, for example). I would be grateful for advice on the cards, or kinds of cards, that I should seek or avoid for a first credit card -- as well as whether I'm likely to receive one, and (if not) what I can do to make myself a better candidate. I have heard conflicting advice about the advantages and disadvantages of store cards, cards issued through my bank, etc.
I have an extremely minimal credit history: a moderate amount of federal student loan debt and one small private student loan that I paid off about 2 years ago. I don't believe that I have any marks against me. I have checked my credit report (the free one) through Equifax and I have no late payments, negative accounts, collections or public records.
Thank you for considering addressing this question! I started listening to the show a few months ago and it's prompted me to try to be more proactive about my finances. Stephanie, Minneapolis, MN
Answer: What makes for a good credit card for you is largely determined by how you'll use it. For example, if you pay off the balance every month (the best practice), you're less sensitive to the interest rate and more sensitive to the annual fee. Similarly, if you don't use the card much, you'll want as plain vanilla a card as possible. If you travel a lot, it's probably good idea to shop for a card with a good travel rewards program.
Creditcards.com offers a basic review of the main factors to consider. For example:
- If you're going to pay the bill in full every month, then the interest rate doesn't really matter to you. Look for a card with no annual fee and a longer grace period, so you don't get hit with a finance charge.
- If you're going to carry a balance, you want the lowest possible interest rate and a low introductory rate.
- If this is going to be your go-to card for most of what you buy, look for a card with a generous credit limit and a solid rewards program.
- If it's only going to be used for emergencies, go for a no-frills card with a low interest rate and low fees.
The first thing I would do is go to your bank or credit union and ask if you can get a credit card -- especially if either is on campus. You're a customer and financial institutions have shifted (in general) their mindset away from shedding customers to trying to keep them. What's more, a campus bank or credit union is probably more apt to treat you as a credit-worthy customer.
At this point, you probably have a card. What if you can't get a traditional credit card this way? That's when you turn to a gas credit card or maybe a store credit card. In general, these tend to be high-cost plastic. The idea is to use them on a regular basis, never charging too much, and paying off the balance in full at the end of the month. (You can carry a balance, of course, but I'd rather you didn't.) Once you've established a regular payment history -- typically a year -- you can pick up a traditional credit card.
I doubt you will have to go this route, but if all else fails, you could get a secured credit card. It's a classic way of building up a good credit history and credit score. Around two-thirds of banks offer secured credit cards. You'll open up a dedicated savings account at a bank or credit union. Your credit limit is around the amount in the savings account. You will want to shop around, since fees and terms vary considerably. Again, after about a year, you should be able to switch to a traditional lower-fee (unsecured) credit card.