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You’re Young and You Don’t Use Credit Cards. Here’s How to Build Your Score

A strong credit history is essential. Millennials, your student debt finally comes in handy.

Just 33 percent of millennials own a credit card, according to a new survey by Bankrate. Many are happy to pay with cash or a debit card and avoid the spiral of carrying over a credit balance and getting hit with high interest rates.

But a good credit history can be essential when you apply for an apartment, a mortgage, an auto loan, or a job, or even to get a good deal on a cellphone. Just 22 percent of consumers know that a $20,000, 60-month auto loan can cost $5,000 more for someone with a low credit score than for someone with a high score, according to a survey released today by the Consumer Federation of America and VantageScore Solutions.

"Credit cards don't always have to be bad. They can help you down the line ... as long as you're responsible," Tyler Dolan, a 26-year-old certified financial planner with the Brookline, Mass., financial literacy group Society of Grownups, tells his fellow millennials. The better your credit history, the lower the interest rate on your future loans. And it can be tough to get a credit card after shunning plastic for years1.

Perversely, that's where your student loans can help.

"Each loan that a student takes out per semester counts as a new line of credit, almost like a new loan," Dolan said. "If you pay those loans on time, you are building a great credit history." He recommends checking where you stand on Creditkarma.com, which shows each piece of a credit score and gives recommendations for how to improve it.2

Here's how to start building a credit history, for the day you'll need it. 

Get on someone else’s card 

A family member might agree to let you become an authorized user on her card. Basically, her credit history—which we're assuming is good—is now yours.

"It can be a huge boost to someone without credit," said Gerri Detweiler, head of market information for NAV, which provides free business- and personal-credit scores.

Detweiler has her 17-year-old daughter, who recently started driving, on one of her cards in case she needs money for gas. You really have to trust people to put them on your card—if they go on a spending spree, you'll be liable. Dolan's mother had him on her card while he was in college so he could build a credit history, with the proviso that he use it only for emergencies and occasional groceries. 

"What she didn't know is that I might have bought beer at a grocery store on my credit card," he said.

Get a ‘starter’ credit card

For someone with no credit history, the Capital One Platinum credit card is an option, said Jill Gonzalez, an analyst for Wallethub.com.3 The card has no annual fee and no reward program, and you'd definitely want to pay it off every month: The interest rate is 24.99 percent. While people with a short or blotchy credit history get cards with high interest rates, a 14 percent interest rate is average for those with good credit, and the rate could be 9 percent to 12 percent for someone with excellent credit, Gonzalez said.

Use the card responsibly, and over time your credit limit, which may start at $500, will be bumped up, maybe to $1,000 after half a year. "Once you've had that card for six months, a lot more offers will come in that you might be preapproved for," said Gonzalez. They'll likely have a lower interest rate and a reward or cash-back program.

Along with paying the card off every month, it's important to keep your spending well below your credit limit. Millennials have less credit card debt and fewer credit cards, on average, than older generations, according to CreditSesame.com, but those below age 25 use the highest percentage of their credit limit, at 27 percent. That makes sense, since they'll have the lowest limits, but it puts them at risk of having their credit score dinged for using more than 30 percent or so of their available credit. (Go figure.) 

Apply for a secured card

To get a secured card, you put down a cash deposit as collateral; in many cases, that's also your credit limit. As you promptly pay the balance in full over at least six months, you build a credit history. If you have a checking account with a big bank, that should be your first stop for a secured card, said Mike Cetera, Bankrate's personal loans and credit analyst.

"Be very wary of seeking a secured card from a company you're not familiar with," he said, because some companies that specialize in offering secured cards have "horrendous fees."

If you have a few late student loan payments in your credit history, the no-fee Capital One secured MasterCard might be an option, Gonzalez said. It's only partly secured, so you can deposit $49, $99, or $200, depending on your credit profile, to get a $200 credit line.  

Most secured cards don't come with reward programs. One that does is the no-fee Discover It card. It requires a minimum deposit of $200, which is your credit limit. You get 2 percent back at restaurants and on gas and 1 percent on everything else. 

Take out a credit-builder loan

If you don't have a chunk of cash to use as collateral, a secured card may not be an option. With credit-builder loans, you're basically borrowing from yourself to build a credit history. The loan goes straight into a savings account, and you make monthly payments until the amount of the loan is paid in full. Then you get your money back, minus a small amount of interest. 

Some credit unions offer this product to members, calling it a Savings Secure loan. An Austin startup, Self Lender.com, launched its version in March, in partnership with Austin Capital Bank. You get a $1,100 loan with an interest rate of about 11 percent, which goes into an FDIC-insured one-year certificate of deposit in your name. You pay $12 to get the loan and, a month later, start paying $97 a month. 

Those payments get reported to the major credit bureaus. At the end of the year, you've paid off your loan and the CD has matured. So you've paid $1,176 and gotten back $1,101.10 (you earn a little interest on the CD), which means you've paid about $75 to Self Lender.com.4

The company's focus is on the roughly 50 percent of Americans with credit scores below 650. About half of Self Lender's 2,358 members, who have paid off $630,000 of CD-secured loans since March, are under 33, said James Garvey, the company's chief executive officer.

"We get a lot of people who apply for something and get denied because they don't have a credit score," he said. "It's a Catch-22."

Document debt payments

Some landlords and utilities report rent payments to the credit bureaus, but it's hit or miss, said Bankrate's Cetera. Dolan of the Society of Grownups recommends that renters get receipts from all their rent payments.

"If they want to buy a house down the road, it might help to show that record to the mortgage lender," he said. "It's not on your credit history, but anything you can do to document that you are responsible with your debt payments helps."  

Build credit with microloans

Lenny is a mobile lending app that targets consumers between the ages of 22 and 35. A sort of microlender that reports your payments to two of the three major credit bureaus, Lenny can help you build your credit score and can be a cheaper way to get emergency funds than going to a payday lender or getting hit with multiple overdraft fees. To judge risk, the company looks at such things as your college, major, grade point average, LinkedIn page, and many other data points.

For members, who pay $2 a month, Lenny can make loans from $100 to $10,000 in three minutes, said  Joe Bayen, founder and chief executive officer. You can then transfer the money to your bank account or send it to a friend who uses Lenny. (A little like Venmo.) If the loan is paid back within 30 days, there is no interest charge. The app has lots of prompts to alert you when you're doing something that could hurt your credit score, such as getting too close to a payment date while having drawn down 30 percent or more of your credit line.

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(Corrects the deposit and credit line examples for the Capital One secured MasterCard.)
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  1. 1 The survey's finding that 33 percent of millennials have a credit card is low compared with some other surveys. A 2015 FICO study found that 60 percent of those between the ages of 18 and 24 had at least one credit card.
  2. 2 There is no formal relationship between Creditkarma.com and the Society of Grownups, the society says. It also recommends using Mint.com.
  3. 3 Gonzalez says Wallethub.com does not get compensation from credit card issuers.
  4. 4 If you can get a credit card with no annual fee, and pay your balances off every month, you may be able to build credit with less than $75.