Getting a credit card is on the to-do list for many young adults. But if they don’t have much income, it might be more difficult than they think.
Credit-card companies used to dole out credit much more freely than they do today, marketing aggressively to young people to entice them to apply for cards. Those practices changed following passage of a federal law in 2009 that imposed various restrictions on credit-card issuance to minors and students. While the goal was to rein in excesses in credit-card issuance, it also made it harder for many young people to qualify for credit.
At one point, “it was too easy to get a credit card,” says Ted Rossman, senior industry analyst at Bankrate.com. Now, “it has become increasingly difficult to build credit,” he says.
For parents seeking to help their children obtain credit cards, here are answers to a few common questions.
My child already has a debit card. Does he or she need a credit card, as well?
While a debit card has its advantages, there are certain things it can’t offer that a credit card can. Namely, credit cards allow users to establish a credit history and increase their credit score, which can be critical for purchasing big-ticket items later on in life such as a house or car, or even for starting a business. Having little to no credit can hinder young adults’ ability to get loans, or get optimal rates, resulting in them having to pay more in interest than they otherwise would.
What does an 18-year-old need to qualify for a first credit card?
Generally, credit-card companies rely on factors such as income and credit history when deciding whether to issue credit. By law, card issuers must require proof of income or a cosigner if an applicant is 18 to 20 years old, says Brooklyn Lowery, editorial director of CardRatings.com, which offers ratings and reviews of credit-card offers, and is owned by QuinStreet Inc., a publicly traded marketing company. The trouble is, many credit-card issuers don’t offer a cosigner option, and many 18-year-olds don’t have enough income to be approved.
The Credit CARD Act of 2009 doesn’t spell out exactly how much income a young adult needs to qualify for a credit card, and it varies by issuer. But for applicants who are 18 to 20 years old, whatever income they have must be their own. A regular allowance from parents, wages and tips, trust-fund payouts and investment income or benefits directly received all count as income. However, young people can’t claim their parents’ income, even if they’re students, Ms. Lowery says. Applicants could be required to show documentation such as bank statements or a W-2.
What changes at age 21?
Once an applicant turns 21, the proof-of-income requirements loosen. At that point, applicants can report any household income to which they have an expectation of access, not just income that they generate, Ms. Lowery says. So, for instance, those who are 21 or older can report income from a partner or spouse on their credit-card application.
So how can someone without regular income get a credit card at age 18?
Parents can add their children as authorized users on their credit cards. This allows young adults to have a card in their name and build a credit history for later in life. Parents should first ensure that their card issuer reports authorized users to the credit bureaus, as well as their card’s full on-time payment history. According to credit bureau Experian, your child will reap the most benefits in terms of building a credit history if you have a longstanding account with a spotless payment history and a low credit utilization rate, meaning you are using only a small slice of your total available credit.
What are the downsides of adding an authorized user?
Making a child an authorized user on your credit card comes with risks, says Matt Schulz, chief credit analyst at LendingTree, which operates an online loan marketplace for consumers seeking loans and other credit-based offerings. It’s “easy to get burned if you don’t know what you’re getting into and don’t have some pretty blunt discussions [about spending] before giving the child the card,” he says.
Authorized users bear no legal responsibility for paying back purchases, so “if they go on a big shopping spree, it’s on you, the parent, to pay that money back,” Mr. Schulz says.
On the plus side, many issuers provide options to help parents track spending and to put spending limits on authorized users, which lessens the associated risks, says Mr. Rossman of Bankrate.com.
Can I remove my child as an authorized user?
Yes, but once you remove a child as an authorized user, the history of that card goes away. That could lower your child’s credit score since it affects the length of the young adult’s credit history, as well as his or her credit-utilization ratio.
One workaround, assuming a young person has responsible credit habits, is to keep the child as an authorized user until the child’s credit is more well-established, says Mr. Rossman. But that could take several years, he says.
Could a secured card be an option for a first card?
Perhaps. Secured credit cards require an upfront deposit as collateral, often $200 to $500. But card issuers are still required to consider a consumer’s ability to make required payments, so an applicant will still need to show proof of income, even for a secured card.
Different card issuers may handle these situations differently, Mr. Schulz says. It might be easier, for instance, to get a credit card from the bank where the young adult has a checking account, he says. “That bank might feel more comfortable lending to you because they know more about your financial standing, thanks to that checking account,” he says.
Is lying on a credit-card application a big deal?
A credit-card application is a legal document, and falsifying legal documents is a serious no-no. It’s a federal crime punishable by up to 30 years in jail and as much as $1 million in fines.
While you may think you won’t get caught, financial institutions can be vigilant when it comes to income verification. No sense taking unnecessary chances.
Authorized user. Person added to a credit-card account by the primary cardholder. The authorized user receives a credit-card plate with his or her name to make purchases. Being an authorized user can affect your credit score positively or negatively if the card issuer reports payment information to the credit bureaus.
Cosigner. Someone who applies with you for a credit card and is responsible for the debt if you don’t pay. Many issuers no longer offer credit cards with cosigners.
Credit CARD Act of 2009. A law designed to offer certain consumer protections. It also tightened rules on credit-card issuance, making it harder for some people to qualify for credit.
Credit bureau. A company that gathers credit-related data and provides reports to lenders and creditors to determine a borrower’s creditworthiness. There are three major bureaus: Equifax, Experian and TransUnion.
Credit-card issuer. A bank or other financial institution that provides credit cards to consumers.
Credit history. A record of a borrower’s repayment of debts. Lenders use this information to determine whether to lend to consumers and in deciding the terms.
Credit score. A number, generally between 300 and 850, that is based on your credit files and represents your creditworthiness. It helps creditors determine whether to lend consumers money and the terms to offer. A high score means more-favorable loan terms.
Credit-utilization ratio. Also known as credit-utilization rate, it represents your total credit balances divided by your total available credit. There are two types of rates, per card and overall, and both are important in maintaining a good credit score. Typically borrowers should aim to keep their credit utilization below 30%.
This article was originally published in The Wall Street Journal on August 10, 2022, and written by Cheryl Winokur Munk.
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