It’s the quintessential catch-22: You can’t build credit until you have credit of your own. Then again, banks are hesitant to give you a credit card when you lack any type of credit history at all.
This is how young people start their adult lives every day – lacking a credit profile, yet unable to prove themselves to get credit to begin with. So, how does one get started? And, how young is too young to get a credit card anyway?
How the Credit CARD Act of 2009 Affects Young Consumers
You can apply for your own line of credit once you’re 18 years old, and that’s a good thing. By making it a point to build credit early, you can be on your way to a long history of responsible credit use by the time you’re ready to buy a home or finance a car.
The Credit CARD Act of 2009 throws a slight wrench into the equation, however. Created to protect people of all ages from predatory lending practices and fine print, the CARD Act adds some caveats that make it harder for young people to get credit on their own. Per the new rules, a credit card cannot legally be issued to a consumer under the age of 21 unless they submit a written application and meet the following requirements:
- A cosigner over the age of 21 is willing to sign onto the application.
- Any applicant under the age of 21 can prove an ability to repay their own debts.
In addition, card issuers cannot increase the credit limit of anyone under the age of 21 without the written approval of their cosigner. Plus, pre-screened credit card offers cannot be sent to those under the age of 21 unless the individual has manually opted in to receive them.
If you’re under the age of 21 and have a part- or full-time job that provides proof of income, you should have no trouble qualifying for a credit card – even after taking the new rules into account. If you aren’t earning an income however, you will need a parent or adult to cosign.
Which Type of Credit Card is Best for Young People?
Young people with an income can start building credit early – as long as they can qualify for a credit card on their own or get a cosigner. As a general rule, there are two types of credit cards geared toward young people trying to build credit from scratch.
For students able to qualify for an unsecured credit card, the first type of card to consider is a student credit card. While student credit cards can really work for anyone, they are mostly designed for young people trying to build credit for the first time. Student credit cards tend to come with lower credit limits at first, and may not offer a lot of perks. However, they are generally easier to qualify for when you’re young and have a limited credit history.
If you don’t have any type of credit history at all, a secured credit card might be your next best choice. Unlike unsecured credit cards that don’t require collateral, secured credit cards require a cash deposit upfront. This cash deposit is considered a security payment for your line of credit, and is generally equal to your credit limit.
If you put down a $500 deposit, for example, your credit limit should be close to $500. While this may not sound like an ideal way to build credit, a secured card might be the only type of card you can qualify for at first – and borrowing against your own money isn’t a bad way to learn the ropes of responsible credit use.
However, don’t feel like you’ll be stuck with a secured credit card forever. After many months of responsible use, you can usually upgrade your secured credit card to a traditional unsecured card. As long as you don’t default, you’ll also get your deposit back.
- Related: Best Secured Credit Cards
Building Credit without a Credit Card
Although getting a credit card of your own early on is often the easiest way to begin establishing a credit history, there are other options at your disposal. For example:
- Ask to be an authorized user: According to the Consumer Financial Protection Bureau, adults can help teenagers build credit by adding them to their own credit cards as an authorized user. If the adult in your life has good credit, this can boost your credit score. However, both parties will be on the hook for any amounts charged on the card.
- Take on federal student loans: While you should never take on student loans (or debt) just to build credit, federal loans are a smart way to build credit from scratch if you need to borrow money for college. Because you don’t need a cosigner to get a federal student loan, you can qualify on your own regardless of income or status. Make your payments on time and you’ll start building a good credit history in no time.
- Take out a small loan at your bank or credit union: If you need to borrow money for school or a car and have a relationship with a bank or credit union already, you might try them out first. Securing a small installment loan is a great way to build credit as long as you make repayment a priority.
- Take out a peer-to-peer loan: Peer-to-peer lending firms like Lending Club and Prosper allow anyone to apply, and potentially get approved. You might pay a higher interest rate if you have a limited credit history, but your credit activity will be reported to the three major credit reporting agencies – Experian, Equifax, and TransUnion.
Your parents can add you as an authorized user to their credit cards when you’re a teenager. Once you’re 18, however, you can apply for your own credit card provided you have a cosigner over the age or 21 or can provide proof of income.
Either way, building credit early is helpful if you want to be ready when you’re established enough in your career to buy a home, finance a car, or borrow money to start your own business. With a long credit history that illustrates years of responsible use, you’ll be able to borrow money at the lowest rates and take out loans with the best terms available. As always, the key to building credit and actually improving your score is building good credit habits early and using credit responsibly.
How old were you when you got your first credit card? Would you ever add your teen as an authorized user?