If you're in your early to mid-20s and living at home, you're in good company. As of 2014, more than 32% of millennials were living with their parents, and more 18- to 34-year-olds live under their parents' roof than in any other arrangement, according to the Pew Research Center.
Of course, moving back home can be a smart move if you're saddled with student debt and want to establish a financial safety net without having to worry about making rent. But just because you live with your parents doesn't mean you shouldn't get a credit card.
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Quite the contrary: The moment you have a job, and a means of paying a credit card bill, you should apply for a card (ideally, one that comes with decent rewards) and start using it regularly. The reason? It can help you build credit, provided you make all of your payments in a timely fashion. And if you ever expect to make it in the real world on your own, you'll need a respectable credit score.
Why you need a credit card
Credit cards offer certain benefits that have nothing to do with credit scores. For one thing, credit cards make it easy to track your spending, since you can log onto your account at any time and see what balance you've racked up to date. (They can also open the door to overspending, but if you're careful, that won't happen.) Credit cards also tend to offer rewards just for using them. You might, for example, get a certain amount of cash back for charging the items you were already planning to buy. Plus, credit cards typically come with purchase protection, so if an item you charge is lost, damaged, or stolen, you're covered.
But aside from these benefits, one major reason you need a credit card when you're younger is to build your own credit. Without a decent credit score, you'll have a hard time renting an apartment or buying a home of your own -- and unless you want to stay under your parents' roof forever, you'll need to work on bringing that number up.
Now there are five key factors that go into calculating a credit score:
- Payment history, which is a measure of how timely you are with your payments.
- Credit utilization ratio, which is the extent to which you use your available credit.
- Length of credit history, which is the number of years you've held accounts for.
- New credit accounts, which is the amount of financing you apply for at once.
- Credit mix, which is a representation of the various types of accounts you have.
Of these, your payment history carries the most weight. But if you're living at home and therefore aren't responsible for monthly bills like rent, utilities, or cable, you'll have a hard time establishing a strong payment history, even if you're financially responsible by nature. On the other hand, if you open a credit card and start using it regularly -- say, to pay for gas, clothing, or restaurant meals -- you'll have a real opportunity to boost your payment history, provided you pay your bill on time each month. Do this for, say, a year, and you're likely to see your credit score go up.
Having a credit card can also help with the second item on the above list: credit utilization. Your credit utilization ratio is a measure of how much of your credit line you're actually using, and for it to help your score, it needs to be at or below 30%. This means if you open a credit card with a $1,000 limit, but make a point never to charge more than $300 at a time, you'll boost your credit score by virtue of keeping your ratio down.
Finally, the younger you are when you get your first credit card, the more favorable a rating you'll get on the third category above: length of credit history. Say you start using a credit card at age 24, and that account remains in good standing. Come age 30, you'll have six years' worth of credit history. On the other hand, if you wait five years to open that account, by the time you hit 30, you'll only have had it for a year, which won't work as well to your advantage.
Even if you're living at home and don't have many expenses to go on a credit card, it pays to have one nonetheless. Consider it an investment in your credit score and long-term financial independence.
