Cash is king with young people, but it is not helping them build a credit history or boost their credit scores.
While many young people use cash to keep themselves from building up debt, they are also putting off some aspects of adulting. You need a credit history to get mortgages or car loans, qualify for apartment rentals and get some jobs. Credit scores even factor into dating conversations.
Although debit cards can have credit card functions, they do not get reported to the credit bureaus and, therefore, have no effect on your credit score, said Amy Thomann, head of consumer credit education at TransUnion, one of the three main credit reporting bureaus.
Here is how millennials can build a credit history:
• Get a credit card. Young people can start building a credit history by being an authorized user on a parent's credit card. They can also pretty easily get a secured credit card, which are offered by most major carriers, said Matt Schulz, chief industry analyst for CompareCards.com, a division of LendingTree Inc. These cards function akin to prepaid debit cards. You put down a deposit that functions as your credit limit, but you do not have to reload after each billing cycle.
Most young people who have any kind of job will also qualify for a regular, unsecured credit card. Keep in mind that the average interest rate for credit card balances are over 17%, and late fees can be up to $35.
• Risk for reward. Most credit cards also come with cash back or travel rewards, which you can pick depending on your preference.
You get more fraud protection if your card is compromised than with a debit card. And you usually get things like rental car coverage, which can save you the fee for the collision damage waiver, which could be $10 or more a day.
Most of all, credit cards do not have overdraft fees.
• The caveats. Credit cards are a smart move for people who will pay off their bills each month. Schulz recommends getting started by charging a recurring subscription, like Netflix or Spotify, and then paying in full each month. Automate the payment from your bank for an even more foolproof approach.
TransUnion's Thomann did this herself when she was first starting out. While her company has a new product that will help walk young people through building their credit as part of a $24.95 monthly subscription, she also recommends making use of the free annual credit report available to all Americans (annualcreditreport.com) to get your baseline.
Beth Pinsker writes for Reuters.