Over 3.3 million high school students graduated this year, and nearly two-thirds of them started college. Another 1.8 million college students are receiving their bachelor’s degrees. Nearly 200,000 of all those young adults will join the military.
They also have another new life project: building a credit score. A few of these servicemembers are still younger than 18 — too young to apply for their own credit card. Others (finally!) have a paid job and can qualify for their first credit card on their own. All of them have to build a credit rating before they’ll be able to borrow money at reasonably low rates.
Their credit rating won’t just help them buy stuff. It also helps them rent an apartment, start utilities accounts, and get cheaper insurance. It will even affect their military security clearance. Experian and TransUnion are even experimenting with collecting rent-payment data to add to their credit-scoring algorithms.
A few may have decided to enjoy their lives without a credit card. You don’t “have” to own a vehicle. You can certainly live on base and avoid having most utility bills, let alone personal property insurance. You can pay monthly bills through debits to your checking account. Yet even hardcore Stoic minimalists have another very important reason to watch their credit rating: identity theft. If you have to keep an eye on your credit rating, then you might as well make it work for you.
The CARD Act of 2009 immediately cut back the fees and interest rates charged by the credit industry. Because of this lower revenue, companies also cut back their lending risks by requiring borrowers to have higher incomes and less debt. This made it harder for young adults to get their first credit card and build their credit score. Fortunately those with regular income (like a military paycheck or a scholarship stipend) became even more popular targets for credit companies. Unfortunately their credit was still limited by low income and student debt.
What can young servicemembers do to get their first credit card?
A Secured Credit Card
One more time: the purpose of your first credit cards is to help you build your credit rating. Once you have a good credit rating, you can upgrade to better cards with higher limits and more rewards.
Those last two credit-card options make this one look pretty good.
A secured credit card is a stepping stone to good credit. It works very well because you’re using your own money to guarantee your credit-worthy behavior. Your card use (or abuse) is sent to the credit-reporting agencies in the same way as a regular (unsecured) credit card.
It’s been a few decades since I’ve had one so I asked J.J. Montanaro, a Certified Financial Planner at USAA, about the latest process. J.J. sees these questions all the time at his column “Ask USAA” and at Military.com. He says “You need to be in the game in a responsible way. Someday you’ll want credit to borrow money, so getting a credit card is important. Make it part of your financial toolbox.”
If you’re in the military then you’re eligible for a USAA membership, and if you’re at least 18 years old then you’re eligible to apply for the secured card. You’ll open a two-year variable-rate Certificate of Deposit with USAA Bank as a guarantee. Your credit limit will be the amount of money that you deposit into the CD.
The good news is that you can open the account with as little as $250 and you can add more money (in $25 increments) at any time. You earn interest while also building a positive credit history. Your credit history is reported monthly to the credit agencies, and it’s reported as a regular card (instead of as a secured card). USAA also offers a free monthly Vantagescore Credit Score and the Credit Score Tracker, a tool that shows members how their score changes over time.
The other news is that the secured card has a $35 annual fee and does not offer points or rewards. If you were going to make this card “pay for itself”, at today’s rate of 0.46% APY you’d have to deposit just over $7600 (= $35 / 0.0046). If you deposit less, then you’re essentially paying the bank to help you build your credit rating. Even at “just” $250, though, you’re still building a credit history at one of the best military-friendly deals available. Shop around for your optimal combination of limits and fees.
When you’ve served your time with the secured card, you can apply to USAA for an unsecured (no fees!) credit card. This does not happen automatically, so mark the two-year date on your calendar. (Once you have your new credit card, then invest your CD or add it to your emergency fund.) J.J. says that if you’re not on active duty then USAA will accept a broad definition of income for an unsecured card: wages and tips from part-time jobs, service-academy pay, ROTC college stipends, and even allowances.
For those with damaged credit, a secured card can give a big boost to your credit rating. It might be the only type of credit card you can get, and it’s a wonderful opportunity to show that you’re paying your bills responsibly. I’ve heard that USAA has approved secured cards even when your credit score has the number “5” in it.
The Government Travel Charge Card
You may be required to use this one. (I can already hear older readers groaning in agony and rolling their eyes– especially my Navy daughter.) All of the military services use the GTCC system to track DoD’s $8B in annual travel expenses, which means that nearly all servicemembers are required to use it for official travel during temporary duty and transfers. Ideally you’ll pay for the trip with your card, file an electronic travel claim, and have your reimbursement before your credit-card bill is due. DoD has pursued this goal for nearly 20 years but there are still glitches.
The good news is that the federal government might encourage Citi Bank to issue you a credit card. The military will even train you how to use the card. (That’s mandatory.) Citi Bank may also send a summary of your GTCC account use to the credit reporting agencies, so the government could help you build your credit rating. However, you may not be able to use the card often enough for your spending behavior to be useful in building your record.
The “other” news is that Citi Bank can still decline an application, especially if you’re younger than 18 or have a low credit score. If you’re approved for the card, it may still have significant restrictions on it by both Citi and your military command. Still worse, if you’re delinquent then the card agreement authorizes Citi to garnish your pay. They’re even allowed to make you pay their expenses to file and process your “salary offset”. Not only are you at the mercy of your service’s travel claim system, but you may have to pay your credit-card charges out of your own assets in order to avoid trouble with your chain of command.
My advice: use the GTCC only when required, and keep a small emergency fund on hand to pay the balance. If your travel claim is delayed (for whatever reason) then you want to be able to pay the balance and avoid even worse trouble. The best way to handle that problem is to lend the government your money.
What else can young servicemembers do? Well, these other options might not be particularly attractive but they’re certainly better than mishandling your GTCC.
Co-signers or authorized users
This is an easy way for a young adult to build a credit rating. It can also be one of the most dangerous.
Instead of applying for your own card on your own credit rating, you’re using someone else’s credit rating while you build yours. Co-signers agree to pay your credit-card balance if you don’t, while authorized users issue you a card (in your name) on their account.
The process is fairly straightforward: the credit-card company issues you a card because someone else agrees to be responsible for your bills. The catch is that you have to persuade someone to trust you enough to be your co-signer or to add you to their account.
When you have a co-signer, you’ll still build your own credit rating. When you’re an authorized user, the card company may send a summary of your record to the credit-reporting agencies. However, they might also elect to report semi-annually– or not at all. In the meantime it’s like getting along with a roommate in a very small apartment: two people have to stay within the same account’s credit limit, make sure that the balance is paid, and deal with the manager if the card’s data is stolen or hacked.
It pays to be extra careful with payments. You may want to consider paying off the balance several times per month, or even transferring funds to the credit-card company as soon as the charge shows on the account. You could backstop yourself by authorizing the card company to automatically transfer the full amount due (or at least a minimum payment) from your checking account every month. If you know that you’re going to be “hard to reach” (like a deployment to the desert, or a 90-day submarine patrol, or Ranger school) then consider not using the card at all– or pay in advance.
Co-signers and authorized users will eventually build your financial credit rating, but it’s also an alarmingly effective way to destroy a personal relationship. A family member (or significant other) is placing their trust in you– along with their credit rating. If you make mistakes that ruin your credit rating, you’ll also affect the credit rating of the co-signer or the account’s owner. Not only can you trash your credit rating instead of building it, but you can trash theirs at the same time. Worst of all, they’ll literally have to pay for your mistakes.
Despite these drawbacks, this might be the only option for 17-year-old servicemembers. Even though you’re considered old enough to die for your country, you have to be 18 years old to be legally bound by a credit-card agreement.
Once you have access to this type of credit, use it sparingly. In addition to staying within your credit limits and paying on time, don’t push the envelope. Try to keep balances at or below 25% of your total credit limit. While you’re building your credit rating with this method, don’t apply for other loans. That could give the card company’s computers the impression that you desperately need more money and might have trouble paying your balances.
This is a temporary tactic. Use co-signing and authorized users only for the time that it takes to get your own card. Keep an eye on your credit report every 4-6 months (a free copy is available at AnnualCreditReport.com) and read the fine print on your credit card bills and agreements. As soon as the card company will approve you for your own card then ask them to remove the co-signer, or to upgrade you from an authorized user to your own account. You might also receive a pre-approved offer from another card company (because they’ve watched your credit rating too!). Search for good offers, minimize your applications, and only go for the opportunities that offer the best deal for your situation.
By now you’re probably thinking that these are painful ways to build a credit rating, and you’d be right. I’ve lowered your expectations, so let’s describe secured cards.
Which credit card option should you choose?
Well, that’s partly a trick question because the GTCC is mandatory. Considering the remaining choices, though, I’d deposit money into a variable-rate two-year CD and pay $35/year. I know that I’d rather not risk my relationships with family and friends.
You might even be able to do both: instead of asking for a co-signer or an authorized user, see if family or friends are willing to give you the cash to deposit into the CD. Two years later you’ll return the money (with interest) and you’ll have your own unsecured credit card. If you have to put a price on a relationship then this is the best way to live happily ever after.
If you’re trying to become even more credit-worthy, here’s one of the most comprehensive guides I’ve ever seen to raising your credit score. Browse through that link for a few minutes to see what catches your eye.
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