[I recently wrote a Next Avenue blog post about attending the college graduation of my niece Caitlin Bonney and offered a few long-term money and career tips to her — and to the rest of the Class of 2014. But Caitlin says she and her friends have a few more urgent personal finance questions. She lays them out below and I answer them. — Kerry Hannon, Next Avenue personal finance and work blogger]
Since I graduated from the University of Richmond last month, I’ve listened to inspiring graduation speeches, read cheesy greeting cards and have received plenty of heartfelt advice about following my dreams and staying true to myself.
It is great to be reminded of these things, I know.
But to be honest, what I really could use right about now is someone to help me with three practical money questions (which I will share in a minute).
I casually mentioned this to my Aunt Kerry, an esteemed personal finance writer for Next Avenue, Forbes, AARP and The New York Times (among others) as we were strolling along the James River in Richmond the day before graduation.
(MORE: 8 Money and Work Tips for My College-Grad Niece)
A Little Embarrassed
As a finance major, I was initially embarrassed to admit how much I didn’t know about credit cards, renter’s insurance and bank accounts. I explained to my aunt that many of my friends were fuzzy about these important personal finance matters, too.
My Aunt Kerry was a little surprised at my naivety. I think most adults forget that few of us are formally taught about personal finances and that, frankly, people in their 50s and 60s have trouble remembering their own trials and tribulations when they were just starting out.
But I was undeterred. Below are three questions vexing my friends and me — money matters I bet many newly independent young people are grappling with — and her answers.
Caitlin: How do I get a credit card? You can’t qualify for a card unless you can prove you’re worthy by having a credit history, but how can you have a credit history when you don’t have a credit card?
Kerry Hannon: This is a tricky one and definitely a Catch-22.
Before I tell you how to get a credit card, let me first make a racket about the dangers of running up credit card debt. (Caitlin: I’m speaking from personal experience — yes I do remember what it was like starting out.)
Sure, you typically need a credit card to pay for big expenses from hotels to airline tickets. I get it. But repeat after me: “I will always pay my credit card bill each month when it’s due — and in full.” If you only make the minimum monthly payment, you’ll likely be slammed with a high interest rate.
Twentysomethings these days often pay credit card rates of 22 percent or higher (!) because they lack a credit history and may have a low credit score. The average credit score for Millennials, according to the Experian credit bureau, is 628; for boomers, it’s 700.
So when you do get a card, pay your balance each month and be happy that you get about 30 days to make the payment (that’s called the “float”).
With that off my chest, I’d suggest that if you don’t have a credit history to speak of, you might want to hold off applying for a card until two months or so after you start working. Card issuers want to see an income stream before they’ll approve you, so by waiting a bit you’ll boost your chances of getting plastic.
Before applying for a credit card, get your latest credit report (free from Annualcreditreport.com) and credit score (free from sites like Credit.com, CreditKarma.com, CreditSesame.com and Quizzle.com). These will let you see what a card issuer would find out about your credit history and prepare you for your chances of being approved. If you see a mistake in your credit report, fix it by following the advice in Next Avenue’s article, “Why You Must Check Your Credit Reports for Errors.”
Traditionally a Visa or MasterCard was considered the best option to demonstrate you could handle credit responsibly because these cards let you “revolve” debt (carry it over month-to-month) if you make at least the minimum monthly payment. The standard American Express card, by contrast, requires you to pay in full each month.
But this time-honored rule seems to be going the way of the desktop computer. “If a new graduate can qualify for an Amex card, that card will still help him or her build a credit score,” Gerri Detweiler, director of Consumer Education at Credit.com, told me.
An easy way to build a credit history is to ask your parents to add you as an authorized user on one of their cards. The card will then show up on your credit report and it’ll have your name on it. Your parents must make on-time payments to the account to protect your credit record and theirs. After about six months as an authorized user, you can then apply for a card on your own.
Otherwise, a good place to shop for your first credit card is your bank — or credit union, where interest rates and fees tend to be lower.
Check out CardHub.com, which just published its 2014 list of the Best Credit Cards for High School and College Graduates.
The site also has a list of cards for people with no credit history. The rates on these cards these days range from 11.9 percent to 24.9 percent. Many of these cards are “secured” credit cards, requiring a security deposit of $100 to $500. With a secured card, you’ll get a credit line of generally one to three times the amount of your deposit. Manage your card responsibly and you may earn credit limit increases. After several months, you can apply for a regular card from the same issuer or from another one.
Once you obtain an unsecured credit card, close your secured card account and your deposit will be returned.
One last tip on credit cards: Visit Lowcards.com to find the best deal. In general, look for cards with no annual fees.
Caitlin: Do I need renter’s insurance? Since I lived on campus, I never had to deal with landlords so I don’t have any experience with renter’s insurance. What is a renter’s insurance policy and do I really need one?
Kerry Hannon: Absolutely. Your landlord will have insurance on the building, but that won’t cover your stuff.
Renter's insurance protects your belongings against losses from theft and vandalism, fire or smoke, lightning and water damage (not including floods). The policy can also cover your living expenses if you’re unable to live in your apartment while it’s being repaired or rebuilt.
Renter's insurance also covers you if someone gets injured at your place and pays legal costs if you’re taken to court. The standard policy provides about $100,000 in liability coverage.
There are two types of policies. One covers how much you actually paid for, say, your computer or smartphone, minus the amount it has lost in value since you bought it (that’s depreciation). The other type is replacement cost, which pays what you’d pay to buy a similar item today.
Renter's insurance only costs around $16 a month, or about $180 per year (though this depends on where you live and size of your apartment). So do yourself a favor and spring for it.
Some insurers will give you a discount if you also have an auto policy with them. Allstate, for example, allows you to add a renter’s insurance policy to an auto policy for about $4 a month.
Compare rates with at least three insurers at Einsurance.com.
Caitlin: What’s the difference between the various types of bank accounts and which should I get?
Kerry Hannon: When it comes to banking, keep it simple. The biggest question is: What do you need your bank for?
For example, do you want to be able to bank through a mobile app? Do you just need a plain vanilla checking account where your employer can direct deposit your paycheck and which you can tap, through an app such as Venmo or PayPal, to pay a friend you owe money?
I like the comparison tool at Findabetterbank.com. It lets you compare checking accounts by ZIP code and screens banks by your preferences (for instance, whether you care about avoiding ATM surcharges or the ability to deposit checks via your mobile phone).
In general, you’ll want to open an interest-bearing checking account that comes with a debit card. To avoid fees, look for an account with no minimum balance or at least a low minimum balance of $500 to $1,000. If your balance dips below the minimum, monthly fees can run you $20 to $35.
Many banks have reward programs attached to their checking accounts, so that’s something else you might consider.
One caveat: Always ask about any fees that might be associated with an account. “High-yielding” checking accounts may restrict how often you can withdraw money from ATMs, how many checks you can write in a month or how much you use your debit card.
It's also a good idea to open a savings account at the same bank. This lets you separate your day-to-day purchases from your savings and helps stave off temptation to spend more than you really should. I find that a savings account is a great place to set aside emergency funds to cover your unforeseen medical bills, car repairs and so on.
At your age, make it a goal to build up enough in the savings account to pay for at least three months of expenses. As you get older and are earning more, you’ll want to increase that savings fund to cover a year’s worth of expenses.
A money market account is another type of savings account you can open at your bank, generally with a minimum deposit of $300 to $3,000. You might earn a teeny bit more in interest with this type of account.
Caitlin: Awesome, thanks! And did I hear you say you’ll help me jumpstart that emergency savings account?