Cash is king with young people, but it is not helping them build a credit history or boost their credit scores.
Among millennials aged 18 to 29, those with a college degree are the savviest about using credit cards, according to a survey released Wednesday conducted by Sallie Mae and Ipsos. As a result, more than 70 percent had decent credit scores above 650, with 40 percent in the excellent range of 750 to 800.
By contrast, college students and those who never finished a degree used credit cards much less frequently and had lower credit scores. Among students, just 20 percent boasted excellent credit while the non-completers had just 8 percent, according to the survey.
“Overall, they more frequently use a debit card. They are more comfortable,” said Marie O’Malley, senior director of consumer research at Sallie Mae.
While many young people use cash to keep themselves from building up debt, they also are putting off some aspects of adulting. You need a credit history to get mortgages or car loans, qualify for apartment rentals and get some jobs. Credit scores even factor into dating conversations.
Although debit cards can have credit card functions, they do not get reported to the credit bureaus and, therefore, have no impact on your credit score, said Amy Thomann, head of consumer credit education at TransUnion, one of the three main credit reporting bureaus.
Here is how millennials can build a credit history:
Get a credit card
Many of the young people in Sallie Mae’s survey did not have a credit card because they thought they would not qualify, but most probably would. Young people can start building a credit history by being an authorized user on a parent’s credit card.
They can also pretty easily get a secured credit card, which are offered by most major carriers, said Matt Schulz, chief industry analyst for CompareCards.com, a division of LendingTree Inc. These cards function akin to pre-paid debit cards. You put down a deposit that functions as your credit limit, but you do not have to reload after each billing cycle.
Most young people who have any kind of job will also qualify for a regular, unsecured credit card.
If you are unsure, Schulz said there is no harm in applying for a card and seeing if you are approved.
Keep in mind that the average interest rate for credit card balances are over 17 percent, and late fees can be up to $35.
“It might not have great terms, so keep your expectations low, but if you have income, chances are you’ll be able to find a card,” Schulz said.
Risk for reward
Most credit cards also come with cash back or travel rewards, which you can pick depending on your preference.
You get more fraud protection if your card is compromised than with a debit card. And you usually get things like rental car coverage, which can save you the fee for the collision damage waiver, which could be $10 or more a day.
Most of all, credit cards do not have overdraft fees, which can be $35 a pop on debit cards. Americans paid $34.3 billion in overdraft fees in 2017, according to research firm Moebs Services.
Credit cards are a smart move for people who will pay off their bills each month. Schulz recommends getting started by charging a recurring subscription, like Netflix (NFLX) or Spotify (SPOT), and then paying in full each month. Automate the payment from your bank for an even more foolproof approach.
TransUnion's Thomann did this herself when she was first starting out. While her company has a new product that will help walk young people through building their credit as part of a $24.95 monthly subscription, she also recommends making use of the free annual credit report available to all Americans (annualcreditreport.com) to get your baseline.
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