As young adults establish their financial independence, they may be overwhelmed with enticing credit card offers. Free airfare, cashback and special introductory rates may be tempting. But it’s important for your young adult to carefully review all their options when building credit with a credit card.
Younger consumers are increasingly opening up credit cards, according to our research. Our Quarterly Credit Industry Insights Report found that Gen Z consumers made up more than 14% of total credit card originations in Q2 2021 – up from 9.5% two years prior.
If your Gen Zer is wondering how to start building credit, consider the following strategies.
Rewards credit cards are popular because of their perks and bonuses like cashback, bank points and travel miles on their purchases. But as exciting as they may be, if your young adult isn’t careful, spending can easily get out of hand. These cards, some of which have annual fees, should be reserved for those who have a set budget and strict spending plan.
When just starting out, young adults may have trouble getting approved for a credit card independently. That tempting rewards card may be out of reach for them at the moment. One way to help with this is to add your young adult as an authorized user on one of your credit card accounts. Many lenders report account information for authorized users to credit reporting agencies, which helps develop a credit history.
If your young adult has an established credit history, they may want to consider a student credit card. Student credit cards are no different from other credit cards, though they typically have lower credit limits. This type of card generally requires proof of income for approval, so they make the most sense for students who have a job.
Another option for young adults with limited income and a short credit history is a secured credit card. This type of card will help build credit history like a standard credit card would. The main difference is that secured cards require a deposit up front, and the deposit acts as the card’s credit limit. Despite providing a deposit, your student must still pay back the outstanding balance in full. The funds from the deposit can’t be used to pay off the balance. Once they graduate to a regular card or close the secured card account, the issuing bank will refund the deposit amount.
Whether an authorized user on your account or already on their own credit path, it's important for your young adult to understand how credit works and how to interact with it responsibly. As they learn how to start building credit, a crucial habit to develop is checking their credit reports on a regular basis. Throughout 2022, you can get a free credit report weekly at annualcreditreport.com. For help understanding what’s on the report, check out our interactive tool exploring how to read your credit report.