If you’re an adult without a credit card, the barrier to entry can seem to loom a lot larger than it actually is. Somehow, during the inescapable progression of getting older, you missed a step in the far more deliberate process of growing up and now, not only do you not have a credit card, you don’t have the requisite credit history to get one. Which is how I ended up in my mid-twenties with virtually no credit score whatsoever and a growing understanding that this might have long-term consequences if I ever curtail my cheese budget long enough to save up for a house or a car.
Since it seemed the only benefit I could wrestle out of my late arrival on the scene was a modicum of informed intentionality, I asked Priya Malani, founder and financial planner at Stash Wealth, to walk me through the process of getting my first credit card. It wasn’t nearly as difficult as I feared it would be.
The advice is, I imagine, eye-rollingly obvious to anyone who has already bought into the credit card economy and insufficiently compelling to anyone ideologically opting out. But a 2014 poll found that 29 percent of Americans don’t own a single credit card and I’m willing to bet at least some of them are victims of inertia, like myself.
If you’re used to budgeting based on a debit card or cash, which ensure that you never spend money you don’t have and don’t rack up interest if you miss a payment, switching to credit could be rife with reasonable concerns. Surveys have shown many young people whose financial values were shaped by the Recession are avoiding credit cards to avoid debt. If that fear resonates with you, Malani recommended a new tool (currently in beta) called Debitize which syncs with both your credit card and your bank account to pull money out of the latter as you use the former. At the end of the month, the money in the Debitize account is automatically used to pay off the credit card bill. In other words, it shoulders the work of budgeting throughout the month and remembering to pay off the bill that separates credit cards from debit cards.
But before you can start life-hacking your credit card payments, you’ll need to convince a company to trust you with their virtual funds. This is where your lack of credit history and the infuriatingly cyclical conundrum of trying to acquire a credit card in order to build said credit history will require you to make some concessions. Websites like NerdWallet.com allow you to search cards by preferred features in a satisfyingly modern way but the credit score options don’t include uhh zero, I guess? and if they did, you would be left with nothing to choose from.
When you’re starting out, your options are typically either to have someone vouch for you—a parent or a spouse—or else hand over a deposit to serve as collateral on a secured credit card. If you don’t want to be tied to someone else’s credit and you can’t swing a significant down payment (one that you won’t get back until you close that card, and therein risk negating the credit you’ve built on it), check with your bank. They might be able to appeal an initial rejection on an independent credit card if you have a longstanding history of competent money management with them.
Granted, the card you’re able to get will likely have a paltry limit—I was given up to $1,000—and even that is misleading. “Your credit utilization ratio should never be more than 25-30 percent,” Malani said. “Which means, really, if you open your credit card and are given a $1,000 limit, we don’t want you to charge more than $200-$300 at a time before you pay it off.”
This is because while 35 percent of your credit score comes from payment history—whether or not you pay off the balance fully and on time—another 30 percent is based on this “credit utilization ratio,” or how close you come to maxing out your credit card.
However it’s possible to compensate for the handicaps of a limited credit history by taking advantage of the fact that this ratio resets every time the balance is paid off. Paying off your credit card balance more than once a month allows you to work around a low credit limit (assuming, of course, you do so responsibly and within your overall monthly budget) and builds credit faster than if you wait for the bill to arrive. Going this route, at least in the early going, precludes using a service like Debitize. But taking a little extra initiative each month to monitor your finance is habit that’s worth embracing.
Money is not just numbers and managing it well requires understanding far more than that which goes out must be less than or equal that which comes in. It involves, in part, building good credit. Realizing you’re behind on that can be daunting. But it’s not too late to start—just don’t wait too much longer.