First-Time Credit Card: 4 Rules to Live by Before Applying

Congress prohibited for good reason in its 2009 CARD Act the approval of credit card accounts for older teens and even 20-year-olds unless they met certain provisions. History and statistics show that most young people – and even many twice their age – are not ready for the responsibility of handling credit cards.

Many know that using a credit card can build their credit rating, which they also know plays an important role in their financial lives. Unfortunately, many school boards and even parents still prefer to teach students how to balance a paper checkbook rather than how to build the responsibility necessary for repaying credit card purchases on time and in full.

That said, how should you decide if you or your young adult children have prepared for taking on such obligations? Those who go with their gut or who believe that simply having a full-time income qualifies them for using credit wisely far too often and too quickly find themselves in so much revolving debt that their debt becomes insurmountable.

Instead, try using this checklist before even thinking about applying for a credit card or a store card:

1. Build and maintain an emergency savings fund that would cover 3 months of necessary living expenses

2. Have regular income – full-time or part-time – for at least twelve months in a row

3. Create a budget and live below your means for at least twelve months

4. Use a debit card for twelve consecutive months without having a purchase declined and without using overdraft protection

Why is an Emergency Savings Fund More Important than Building Credit?

Paying yourself first should ALWAYS be your top priority when paying bills and paying for living expenses. Successful savings might be a commitment rather than an amount, but before you consider applying for a credit card or store card (which are simply tools for getting into and using debt), make sure that you have enough money in your savings account(s) to cover your housing, utilities, groceries, transportation, and cell phone expenses. These are your living expenses.

If you were to lose your job and, consequently, your income, or perhaps be injured or experience a medical emergency that leaves you without income for several months, you will need an emergency fund to remain independent. The last thing you want to be doing when you would rather be focusing on finding a job or feeling better is worrying about paying monthly bills.

Why Income Matters for Young Adults Wanting a Credit Card?

Although it seems like it should go without saying how important a steady income is for a young adult to have before he or she applies for a credit card, the reality is that credit card companies do not always focus on the applicant’s income before deciding to approve the account or not.

If you, as a young adult, have had only sporadic or seasonal income over the past twelve months, think twice about applying for a credit card. If you make a purchase on a credit card and do not pay off the entire balance, the credit card company will ask you for the minimum payment each month (usually around 3% of your outstanding balance) that you must pay, employed or not. The card company will also begin to charge you interest, which is the company’s fee for lending you money on the card.

If you don’t have a steady income, you might begin skipping payments. Not only will the card company charge you a missed payment fee, but it will also report your missed payment to the consumer reporting agencies (“credit bureaus”), and such negative activity will remain on your credit record for seven years, lowering your rating and lowering your ability to get affordable loans in the future.

In recognition of the importance of income, the US Congress included in its CARD Act of 2009 a requirement that card issuers request information that proves a young adult not yet 21 years of age has “independent means of repaying” any debts incurred he or she may incur through using the card. (Section 301).

If you have a credit card and foresee a time when you will be losing your income (job change, moving out of state, or otherwise), it would even be wise to hide or literally freeze your card so that you are not tempted to use it for daily living expenses. Live by the motto, “If I can’t pay for it in cash today, I can’t afford to purchase it with a credit card.”

How a Budget Helps Young Adults Prepare to Use a Credit Card?

“Budget” is just another term for a spending plan. The sooner a young adult (or teen, for that matter) learns the central importance of planning his or her monthly spending, the sooner they can break free from the grasp of marketers, online influencers, and advertisers who blow the consumer about from whim to whim tossed like waves on an ocean.

A budget is your roadmap to success. You start by setting a financial goal. Money is not the focus of the goal but a step in achieving the goal. Instead of writing, “I need X dollars for a fun vacation” or even “I need X dollars by May 20XX for a vacation to La Martinique,” a better goal would be, “In order to vacation in La Martinique for 7 beautifully relaxing days in September 20XX, I will need X dollars by saving (X÷Weeks Left) each week.”

Next, note your monthly net income (paycheck amounts).

Then, make a list of your expected expenses and purchases. If you are unsure of how much you expect to spend or what you might spend your money on, track every penny you spend for the next 30 days, noting the date of the expense, whom you paid, how much you paid, and categorizing the spending (e.g. donations, housing, utilities, transportation, groceries, dining out, entertainment, etc.).

Figure out your projected ending monthly balance by subtracting your total expenses from your total income.

If the resulting figure is positive, consider using that money to increase your savings, invest in your long-term retirement plan, pay down your debt(s) or do a combination of all three.

If on the other hand, the resulting figure is negative, you will need to earn more money, cut out expenses, or do a combination of the two.

How Can a Debit Card Prepare a Young Adult for a Credit Card?

Debit cards differ from credit cards in that the money spent during a purchase comes directly from your checking account rather than from a credit card company. Still, debit cards are similar enough to credit cards in some key aspects that help the cardholder know if he or she is ready for a credit card.

Using a credit card for a year or more without having a purchase denied means that you are managing your cash flow, which is central to managing your credit as well.

However, the most critical similarity has to do with the fact that the use of either card requires minimal mental math or calculations. Many consumers who use a debit or credit card to make a purchase will likely not note the purchase in a checkbook register nor even remember the purchase amount by the time they reach the store doors.

Such poor credit management behavior usually leads to mountain credit card and store card balances that soon become unmanageable. Instead, the young adult should use a debit card for at least twelve months, noting every purchase in some sort of expense program, such as a paper checkbook register (more and more rare nowadays), a phone app, or at least by categorizing the purchase in a free banking program such as Mint.com.

Shouldn’t All Young Adults Start Building Credit at Age 18?

Determining whether you are ready for a credit card should be less about a birthday and more about your credit goals and your preparedness for credit. The purpose of a credit rating is to help potential lenders understand how likely you are, as a borrower, to make payments as agreed.

While credit can also be used during the hiring process as a factor in establishing your car insurance premium and as a standard for being approved by a property manager for the apartment you want, you should avoid the idea of building credit for credit’s sake. When it comes to these scenarios, it is usually better to have no credit than to have a poor credit rating. When you are ready to build credit, read our step-by-step credit building guide.

How to Build Credit at 18

If you are 18 and want to build your credit in advance of a home purchase or other major purchase on credit, keep in mind that the 2009 Credit CARD Act changed some of the rules for qualifying for a credit card. Before 2009, you only had to be 18, find a card company willing to take a risk on giving an 18-year-old a credit card, and fill out a credit card application.

The Credit CARD Act now stipulates that you must be 21 in order to apply for credit the way described above. If you are 18 to 20 years old, you must either have a co-signer who is 21 or older, or you must submit documentation to the credit card company showing you have the ability to meet the potential debt obligations incurred through the credit card. This essentially means you have to prove you have regular income sufficient enough to pay for any purchases you make with the card.

Instead of applying for a credit card on your own, first, ask a trusted family member if they would be willing to add you to their credit card account(s) as an “authorized user.” You do not need to use the card (or even see it) to inherit some of your family member’s good credit ratings.

Otherwise, saving up enough money to open a “secured credit card” (ideally, one without an annual fee) will allow you to use a credit card that will build your credit history. You would do well never to carry the card but to use it only to make one payment a month (e.g. cell phone bill or Netflix) that you pay off in full before the due date. Despite the myths you will hear, you do not need to ever carry a balance on your credit card to build your credit rating.

What Might Go Wrong if a Young Adult Is Not Ready for a Credit Card?

What is the worst that could happen if a young adult gets a credit card he or she is not ready for? Unfortunately, Money Fit has seen far too many 19-, 20- and 21-year-olds seeking our bankruptcy certificate services. We are well aware of the possible consequences of poor credit management.

While some of these young consumers have had to deal with unexpected medical debts, many over-borrowed for vehicles, clothing shopping, and travel right after high school or during college. And regrettably, bankruptcy is not the worst possible outcome of the high levels of stress placed on young people with significant debt loans.

Without getting into the differences between the genders, young adults have often not developed the discipline to curb impulses, which certainly includes spending and shopping.

Should I Co-Sign a Loan for My Child?

Co-signing a loan for a young adult, whether for a car, a private student loan, or even a home loan, will likely be more complicated than it seems.

First of all, if you co-sign a vehicle loan, the young adult will learn that it is not only acceptable but expected that adults will have a car loan throughout their life. They miss the opportunity to find the motivation to save and purchase the vehicle they need and can afford at 18, not the vehicle they want.

Additionally, if you co-sign a loan, regardless of what it is for or who the other co-signer is, you should be financially prepared to pay the full loan in the likelihood that the young adult stops making his or her regular payment. The problem is that many lenders will not notify you for six to even twelve months after your co-signer stopped paying that you now owe the entire balance of back payments plus late fees.

Preparing for a Credit Card

Young adults should not rush to apply for credit cards. If you are worried you are not ready for a credit card, chances are you are not. The proper and responsible usage of credit cards requires discipline and a commitment to use them sparingly and only for things you could pay for in cash already. If you believe that credit cards are tools for purchasing things you cannot afford, then you are absolutely not ready for a credit card.

Keep working on your spending plan, using your debit card properly, and building your savings. Once you have built positive habits like these, you will know when you are ready to apply for a credit card.