How do you do, fellow kids? In case you haven’t picked up on it, I’m a millennial. (Shocker, I know.) And as a millennial, I’m here to impart my wisdom on the next generation — you guys.
Gen Zers range between the ages of 12 and 27, for the most part, so many are applying for credit cards for the first time. And as we continue to live in unprecedented times™, world events continue to influence our finances. Gen Z is receiving the brunt of this as “75% of Gen Z consumers said they had their finances negatively impacted by the pandemic-induced recession,” according to a 2024 TransUnion study.
With the world in the throes of chaos, it can be overwhelming to start your credit journey. Let’s take a deep breath together and work through it so the next time another historic event happens (like, maybe next Tuesday), you’ll have one less thing to worry about. I have to say, at least things have stayed interesting.
Many Gen Z Consumers Are Credit Invisible
According to a 2022 report by Experian, 28 million consumers in the U.S. are credit invisible. And of those 28 million, 40% are under the age of 25. Consumers who are credit invisible don’t have a credit file.
There are a number of reasons why someone might be credit invisible. Unless you were given a leg up by being an authorized user on a caregiver’s credit card or something similar, most youths start out with a clean slate and need a little help building their credit.
Coming from a low-income background can also impede someone’s access to credit-building advantages. For example, Experian’s report found that “30% of borrowers in high-income neighborhoods rely on a creditworthy guarantor, while only 15% of borrowers from low-income neighborhoods do.” This creates a domino effect — almost 30% of consumers in low-income neighborhoods are credit invisible, while only 4% of consumers in high-income neighborhoods are credit invisible.
As someone who grew up in a low-income household, I had some experiences with money and credit that are different from many of my colleagues’. I was able to become credit visible when I went off to college, but I eventually learned why I should pay more than the minimum balance every month. I was ready to become credit invisible again but no such luck. Experian, TransUnion and Equifax knew who I was — and I didn’t make the greatest first impression.
[READ: Best Credit Cards for No Credit.]
How Gen Z Can Build Credit
There are multiple money moves someone who is just starting out on their credit journey can make. Here’s what you can do to build your credit as a Gen Zer.
Become an Authorized User
I know we just talked about it, but if there is someone you share mutual trust with, becoming an authorized user on someone else’s credit card is a great way to hitch a ride on another’s credit history. This person is usually a family member or significant other.
You don’t need to use that person’s credit card to benefit from their history. Just make sure whichever card you choose to become an authorized user on has an extensive and positive history.
Get Credit for Rent Payments
Rent payments aren’t automatically part of credit-building — but there is a way to add them. If you’re unsure where to start, talk to your landlord or property manager. Most are aware of the practice and even have a preferred method of reporting.
If your rental property doesn’t have a way of reporting rent payments to the credit bureaus, you can do so on your own through different reporting services. Some include:
— Bilt Rewards. I’m actually part of this one because it’s a preferred method of reporting by my complex. The app and service are free, and renters can actually earn rewards from reporting their rent through the app. Bilt reports to all three major credit bureaus — Experian, TransUnion and Equifax.
— Esusu. For $50 a year, Esusu reports your rental payments to the three big credit bureaus.
— Experian Boost. I used Experian Boost at the beginning of my credit journey, and it was a lifesaver. Not only can you add your rent payments to your Experian credit file, but you can also add utility and cellphone bills. By adding that information, you can increase your credit score in real time. Mine increased by 44 points in one day after adding all the necessary information. Not guaranteeing the same will happen to you, but it’s definitely worth checking out.
— Self. Like Experian Boost, Self lets you add cellphone and utility payments to your TransUnion report along with rent. However, there is a $6.95 monthly fee if you want to add those bills. (Reporting just your rent is free, and it goes to all three major credit bureaus.) You can also request access to up to 24 months of your historical data for a one-time fee of $49.95.
[Read: Best Secured Credit Cards.]
Apply for a Starter Credit Card
The type of credit card you apply for will depend on your credit history. If you aren’t able to become an authorized user, a secured credit card might be the best option.
These cards require a security deposit that generally then becomes your credit limit. So if a credit card requires a $500 deposit, $500 will be your new credit limit on that card. Most secured credit cards require a minimum deposit of $200 but can go as high as $2,500.
If you were able to gain some kind of credit history by becoming an authorized user, a secured credit card may not be necessary. If that’s the case, a bare-bones rewards card could be an option.
Credit cards like the Citi Double Cash® Card and Wells Fargo Active Cash® Card are flat-rate cash back cards. That means you earn rewards in the form of cash back so it’s very straightforward. The Citi Double Cash Card offers 2% cash back on every purchase (no rotating categories to worry about), and so does the Wells Fargo Active Cash. Both have similar interest rates, and neither has an annual fee.
We can talk about travel rewards cards when you level up.
Practice Good Money Habits
Finally, the best way to build credit is to practice good money habits. This means:
— Paying on time every month. This is the time to take advantage of auto pay. Set up your account so you pay your credit card on time every month. Late payments can screw up your credit, as they stay on your credit report for seven years. (Trust me.)
— Paying more than the minimum balance. Do not just pay the minimum amount due! That’s how interest piles up, and you can end up paying twice the original amount in interest alone. If possible, don’t keep a monthly balance at all. Make small purchases that you know you will be able to pay off immediately. Think of this credit card as more of a debit card: Don’t spend what you don’t have.
— Not applying for multiple credit cards at once. This will flag to banks that you’re trying to get the most credit in the shortest amount of time. And that makes banks nervous — especially if you’re just starting out. You’ll suffer dings to your credit score and will most likely get denied anyway. Remember, credit inquiries stay on your credit report for two years. I recommend spacing out credit applications by about six months. So do your research before applying!
— Keeping your credit utilization low. Let’s say you have a secured credit card with a $500 credit limit. You actually can’t spend the whole $500 without negatively affecting your credit score. Rule of thumb is to keep your credit utilization under 30%. So in this case, that would be $150. That means you start venturing into dangerous territory if you spend $150 or more. Which is fine because you’re keeping your purchases small anyway, right?
— Monitoring your credit report. Your credit report and credit score are two different things. Your credit report is a record of your past, while your credit score gives lenders an idea of how you’ll handle credit in the future. And sometimes, your credit report has errors in it. You need to keep an eye on it so if anything strange pops up, you can dispute it. But don’t fret; you can check your credit report for free on a weekly basis at AnnualCreditReport.com.
[Read: Best Starter Credit Cards.]
If you do all this, you’ll be well on your way to an excellent credit score. Don’t get frustrated if it takes a little time, though. And I know I’m old so I already have these conversations, but talk with your friends about credit if you aren’t already. Removing the mystery around a complicated subject helps everyone.
More from U.S. News
Why Is Financial Independence Coming Later for Gen Z and Millennials?
Authorized Users: The Pros and Cons
How Can You Get Credit for Paying Rent?
How Gen Z Can Build Credit originally appeared on usnews.com
