I checked my credit report recently and it appears I was issued my very first card in 1999. I was a full 19 years old, a sophomore at Penn State and had no immediate need for the initial $4,000 credit limit. But as I recall, signing up for the Visa card on campus won me a lovely pair of Nittany Lion shot glasses – much cooler than the oversized tee-shirts another bank was offering down the street.
For better or for worse, those days are no longer. The Credit CARD Act of 2009 prohibits banks from giving away free merchandise to students on and around college campuses. And perhaps the biggest whammy to banks: they can no longer issue credit cards to those under the age of 21, unless the applicant has a qualified cosigner (usually a parent) or proof of sufficient income.
While these new rules are designed to help protect young adults, as with all well-intentioned Acts, there’s a downside, too; starting out will be harder because establishing a first credit line is now more difficult. Why? For one, according to FICO, 15% of your score is equal to the length of your credit history, so starting out early is important. Moreover, new cards will look at how well you do with old cards, and that goes to payment history and debt usage, which combined make up 65% of your score.
With the new age limitations, how can a responsible young adult circumvent the new rules and establish some credit history before age 21 in order to get into the rhythm of good financial behavior and add some length to their credit history? Here’s some advice:
Get a Job. The bill says a young adult’s application must indicate “an independent means of repaying any obligation arising from the proposed extension of credit in connection with the account." It’s no guarantee that having a job will qualify you, but it can certainly boost your chances.
Pay Down an Installment Loan. Unlike credit cards, an installment loan, like a student or car loan, is to be repaid in periodic installments. Paying these debts off on time is an additional way to boost your credit profile and score.
Get a Secured Card. A secured card offers an alternative way to establish credit history. An issuing bank (I recommend a credit union) offers you a credit line usually equal to a sum you deposit with the bank, starting at around $200-$300. Like a regular credit card, you’re responsible for paying back whatever you use (plus interest). Look for a card with low or no annual fees and make sure the issuer reports your activity to all three major credit-reporting agencies.
Join Mom & Dad’s Card. If your parents regularly pay off their bills on time, see if you can become an authorized user on their credit card account. The upside is that you can get credit for their timely and consistent payment activity. The downside is that if your mom or dad falls behind on payments or defaults, you’ll also look like a credit deadbeat.