It’s a fact—you need credit to get credit. But obtaining a first credit card can be a challenge for young adults. Most credit cards aren’t available to applicants who lack credit histories…but it’s difficult to build a credit history without a credit card or some other form of debt.
Answer: A starter credit card or student credit card. These cards typically have low credit limits and are specifically designed to be available to young adults and others who don’t yet have substantial credit histories.
Most major credit card issuers offer student or starter credit cards, but what’s the best first credit card for young adults? Here are the leading contenders—from Bottom Line’s credit card expert Ted Rossman…
Low fees and an appealing rewards program combine to lift this Discover card to the top of the student credit card rankings. It has no annual fee, no late fee for the first late payment and no foreign-transaction fees. The lack of foreign-transaction fees is especially valuable for students studying abroad—though there are countries where Discover cards are not as widely accepted as some other credit cards. Its rewards program is excellent as well—cardholders receive 2% cash back at gas stations and restaurants on up to $1,000 in purchases each quarter…plus 1% cash back on all other purchases…and at the end of the cardholder’s first year with this card, Discover matches the total amount of cash back earned. That match essentially means 4% cash back on gas and restaurants and 2% cash back on everything else in that initial year. No credit score is needed to apply for Discover it Chrome for Students, but as its name implies, the card is generally available only to college students.
Alternative: Discover it Student Cash Back is very similar to Chrome for Students, but rather than offer 2% cash back on gas and restaurants, it offers 5% cash back in spending categories that change each quarter. Best for: Students who don’t spend much on gas and restaurants and who are willing to keep track of those rotating categories.
Like the Discover it Student cards above, this Capital One card has no annual fee and no foreign transaction fee…and it requires no credit score to apply. And like those Discover cards, this Capital One card’s rewards program is excellent—cardholders earn 1.5% cash back on all purchases. Best for: Students who prefer the simplicity of a flat cash-back rate to Discover’s spending categories and first-year bonuses.
Like the Capital One card above, Rise has no annual fee and requires no credit history, and it offers cardholders an attractive 1.5% cash back on all purchases. Unlike that Capital One card, Rise is not only for college students—it’s for anyone who wants to build their credit. The twist with Rise is that while no credit history is needed to apply, an applicant’s odds of being approved increase substantially if he/she opens a Chase checking or savings account before applying and has a balance of at least $250 at the time of application. Cardholders who manage their Rise account responsibly for 12 months will be automatically evaluated for an upgrade to Chase Freedom Unlimited, a mainstream credit card that has better limits and terms than this starter card. Rise does have a foreign-transaction fee of 3%.
Petal 2 Visa is a great option for young adults who are earning a solid income from a first job but who haven’t yet built much of a credit history. While most card issuers rely heavily on credit scores and credit histories when evaluating applications, Petal 2’s issuer puts substantial weight on applicants’ income and/or savings. Petal 2 has no annual fee, no foreign-transaction fees and no late-payment fees. Cardholders earn 1% cash back on all purchases initially, and that cash-back rate can climb to 1.25% and then 1.5% if the cardholder makes on-time payments. Applicants who are not approved for Petal 2 might instead be approved for Petal 1 or Petal 1 Rise, which have less attractive fee structures and rewards programs.
“Secured” credit cards have a big downside versus other credit cards—they require the cardholder to deposit money with the card issuer. The size of this refundable deposit typically is the size of the cardholder’s credit limit, though that can vary. While not ideal, secured cards can be an effective way for a young adult who can’t obtain a conventional credit card to get some sort of credit card and build a credit history…or for anyone of any age to rebuild a damaged credit score. The Discover it Secured card stands above the secured-card pack. While many secured cards impose hefty fees, it has no annual fee and no foreign-transaction fees and the first late-payment fee is waived. Cardholders can choose to make an initial deposit—and thus have a credit limit—as low as $200 or as high as $2,500. It even has an attractive rewards program—as with Discover it Chrome for Students, cardholders earn 2% cash back on up to $1,000 in spending at gas stations and restaurants each quarter…1% on all other purchases…plus all cash back earned in the first year is matched. Starting seven months after the account is opened, Discover will review the account each month to determine if the cardholder qualifies to switch to an unsecured Discover card and have the deposit refunded to them.
Alternative: Capital One Quicksilver Secured is the other major contender for the title of “best secured card.” It has no annual fee or foreign-transaction fees…its rewards program offers 1.5% cash back on all purchases…except for hotels and rental cars booked through Capital One Travel, in which case it has 5% cash back. Responsible card use can lead to graduation to an unsecured version of the Quicksilver card.
Applying for starter credit cards isn’t the only option for young adults who hope to obtain a card and build their credit history. Another solution is to be added to someone else’s credit card account as an authorized user. Most often, it’s a parent who agrees to add his/her offspring as an authorized user, but it doesn’t necessarily have to be a parent—it can be anyone. As long as this credit card account is managed responsibly, the authorized user’s credit history will benefit, improving his odds of qualifying for his own card later. Authorized users don’t even have to be adults—card issuers often set their authorized-user minimum ages below 18. If a parent adds his 16- or 17-year-old child to one of his card accounts, that teen will have some credit history by the time he turns 18. Authorized users can be added to virtually any credit card, but American Express cards offer an advantage—unlike many card issuers, AMEX lets cardholders set a lower credit limit for an authorized user than the card’s overall credit limit, reducing the risk if the authorized user proves less responsible with credit than was hoped.
Important: Discuss card-use parameters with your teen or young adult before adding him to your account as an authorized user. Make sure he understands what sorts and sizes of purchases you consider acceptable…and whether and when you expect him to cover the cost of his purchases. One option for parents who want to help their kids build credit but not risk those kids running up charges is to add those kids as authorized users but not actually give the kids access to the card or allow them to make credit card purchases. But that strategy won’t help teens learn responsible credit card use.
You can apply for a credit card as early as age 18, but if you’re younger than 21 and don’t have a cosigner, the law now requires that you provide proof of income. That income does not necessarily have to be from a full-time job, however—money from a part time job, a seasonal job, an allowance from a family member, or even grants or scholarships could be sufficient.
