Over 14 million students will enter college in the fall. Students will live on their own away from home, for extended periods of time. When they arrive on campus, the majority of these students will not have a credit card in their name, which begs the question: is opening a credit card a sound decision for a college student?
Why Building Credit is Important for College Students
While it may not be the highest priority on your list, the sooner you open a credit card, the sooner you can begin to create a positive credit history. Why does credit history matter? Your credit history is a quick way for lenders to see how well you’ve handled borrowing money in the past. So, when you want to purchase a car, home or anything else using credit, having a positive credit history will help you get the amount you need at a reasonable rate.
Your Bank or Credit Union will run a credit score report via 1 of 3 credit bureaus using your full given name and social security number. The higher the credit score, the lower your interest rate on the purchase. This means you will save money in the long run on interest payments. If your score is too low, or now existent, you could be rejected for the purchase. If you do not have any credit history at all, you will struggle to find a lender to give you a loan when you graduate college.
Tips for Building a Positive Credit Score
If you open a credit card and don’t pay the monthly fee on time, your credit score will be low. Similarly, if you only pay the minimum monthly fee, you may find it difficult to ever pay off your balance in full. These types of actions lead to a negative credit score. So, here are some tips to help you build positive credit:
- Open just one credit card. Remember, you’re a college student with limited income. Open just one credit card for yourself with a small limit of around $500.
- Buy only what you can afford. Use your credit card to purchase small items such as toiletries and other necessities.
- Pay your balance in full every month. Buy only what you can afford each month and pay your balance in full!
- Keep your account open. The longer you keep your account open and in good standing, the better it will be for your credit score. Be sure to check that your card does not have an annual fee.
How to Apply for a Student Credit Card
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) went into effect in February of 2010. It was created to protect college students on campus from being inundated with predatory credit card applications on campus. Financial companies are now limited to when and where they can push credit card applications to students on campus. Now, if you’re under 21, you have to prove independent income or get a co-signer in order to apply for a credit card. There are also rules preventing these companies from marketing to those under 21.
I personally recall seeing thousands of applications on campus during my first year of college! It was tempting to open numerous accounts and ‘have fun shopping’. I am thankful I opened one credit card and maintained a high credit score since freshman year. Lower interest rates have saved me money and allowed me to make more purchases in the long run.
Understanding What a Co-Signer Is
If you are required to have a co-signer, it’s important to know what you are asking of that person. If you do not pay your credit card bill, your co-signer becomes responsible for making that payment. Try to stay away from having a co-signer, if possible, and build your own credit. Once you have proved to yourself and the credit card company you spend and pay your bill responsibly, you can ask them to increase the credit amount.
Some Other Ways to Build Credit
If you feel like you're still not ready to get a credit card, or you're not able to get approved for one, there are some other ways that you can begin to build credit while in college.
- Be added as an authorized user. Being added as an authorized user to someone's credit card, like your parents, allows you to use that credit card and build good credit. Keep in mind that the primary account holder, your parent, is responsible for the debt. That means you need to have a serious conversation about how you will handle paying for the transactions that you are responsible for.
- Research rent-reporting services. If you are renting an apartment to live on campus, you can look into rent-reporting services. These services will report your timely payments to credit bureaus for a fee.
Final Words on Building Credit
Foolish students open numerous credit cards, max them out, and cannot pay them back. Too many students’ credit history was ruined while in college and took decades to repair. Do not follow in their footsteps! Remember: you will also have student loans to pay back upon college graduation.
After you’ve graduated from college and have a proven history of good credit, you can consider upgrading or replacing your credit card. Looks for cards and credit programs that provide you with better rewards, continue behaving responsibly, and pave your own path for success.