About Credit

You might not need credit now, except for school credit, but you will probably need it when you graduate. If you want to buy a car or a house, you need good credit to do that. Your credit score will become as important, if not more so, than your grade point average and your SAT scores were to get you into college. Everyone who loans money or rents homes or apartments looks at your credit score, a three-digit number that indicates how creditworthy you are. Student credit cards allow you to build credit while you are still in school, so if you are a student, you should consider applying for student credit cards.

How Your Credit Report Works

You get that three-digit credit score based on five factors of how you deal with credit: payment history, amounts owed, length of credit history, new credit and types of credit used. Lenders use this number to determine your student credit card eligibility.

• Payment history, which refers to whether you paid your bills on time, counts for 35 percent of your score.

 

• Amounts owed refers to how much of your available credit you use. Ideally, you would use less than 30 percent of your available credit. Otherwise, lenders might worry that you are overextended.

 

• Length of credit history is where getting a card as a student can really boost your credit score: the longer you have a credit history, the better. That accounts for 15 percent of your score.

 

• Both new credit and types of credit used count for 10 percent of your score. The first refers to how much new credit you apply for at once. It’s not good to apply for a lot at once. Lenders also like to see a variety of credit, such as installment loans, credit cards and a mortgage, for example.

 

Spend Small to Build Credit

The best way to use a brand-new credit card is to start small. Use your card only for purchases that you know you can pay off at the end of the month. You might want to buy only gas with it, or you might just want to use it for a small purchase at the grocery store. Showing that you use your card responsibly will raise your credit score.But don’t max out the card to go on a ski trip, for example. For one, maxing out your card lowers your credit score. And for another, if you can’t pay off the ski trip at the end of the month, you’ll have to pay interest on a trip long after you’ve skied down that last run. And if you are late with a payment, or if you find that you can’t pay for the trip, you will have damaged your credit score. Bad credit is worse than no credit.

Your financial future can start while you are still in school. You can be ahead of the game when you graduate if you use a student credit card responsibly.

1. Check with Your Bank

If you have a checking or savings account at a bank or credit union, ask there about how to apply for a student credit card. It’s generally easier to get a credit card from a place you already do business with than it is to apply online or through a financial institution where you don’t have any history. Your financial institution probably wants to keep your business and to maintain a good relationship with you. Approving you for a credit card is one way to do that.

2. Look for Easy Approval Cards

If you can’t get a credit card from your financial institution, look elsewhere. Credit cards issuers often change their deals and terms, so you need to shop around and do some student credit card comparison before you apply for one. In 2014, two student cards gained a reputation for offering easier approval than most: the Journey Student Rewards Credit Card from Capital One and the Citi Thank You Preferred Card for College Students.

3. Control Your Inquiries

You need to consider how many times you apply for credit. Each time you apply for a card, the card issuer sends an inquiry to the credit bureaus. It’s understandable to havea couple of inquiries show up on your credit report when you are shopping for a student credit card, but too many inquiries signals to lenders that you might be a bad risk. They don’t know why you have so many inquiries, so they might assume that you were turned down for a card, or they might assume that you will accept all your offers, thereby possibly overextending yourself. Both reasons makea card issuer likely to turn you down.

Best Practice: It’s best to apply for a card only if you think you’ll be approved. It’s more difficult to be approved once another issuer denies you.

4. Get Your Parents Involved

• Cosign:

  If you can’t get a credit card on your own, ask one of your parents for help. Some credit card issuers allow cosigners, but not all do. As of 2014, Bank of America and Discover allowed cosigners. Card issuers that allow cosigners are more likely to approve you when you have one because if you default on a payment, the card issuer can get the money from your cosigner. You should not rely on your cosigner, however, because you will not learn how to use credit responsibly that way.

• Piggyback:

  Piggyback means becoming an authorized user on your parent’s card. When you do that, you merge your credit with your parent’s credit. This gives you an instant boost to your credit score, which should help you get your own credit after building a history on your parent’s card. A downside to doing this is that if your parent maxes out the card or makes late payments, it affects you, too.

A Safer Product

The Credit CARD Act of 2009, which went into effect in February 2010, set up rules to protect all consumers, and it included provisions for young people and college kids, making it more difficult to get a student credit card.The CARD Act made it illegal for credit card vendors to issue a card to anyone younger than 21 unless that person had a cosigner or could show proof that he or she could afford to pay back debt. Vendors also could no longer offer goods in exchange for filling out an application. If students are educated and understand how a credit card works, it can be a useful financial tool for them.

How Student Cards Differ

Because student cards are designed for students, they often have different terms than standard credit cards do. Many student card issuers approve student credit cards with no credit or if students have just a limited credit history, which applies to practically all students. Many students are establishing credit for the first time with a student credit card. This makes them a higher risk because credit issuers have no way of knowing whether the student will pay back what he or she charges.

Higher APR

When banks take on a higher risk, they typically pass on that risk to consumers in the form of charging them a higher annual percentage rate. Once students develop a credit history by paying back their credit card bills on time for about a year, they can ask the credit card issuer to lower the interest rate, or they can apply for a regular credit card that offers a lower rate.

Lower Credit Line

Another way student credit card issuers minimize their risk is to offer a lower limit, something like between$250 and $1,000. That way, if the student defaults on the loan, the bank won’t be out too much money. If students stay under their credit limit and pay their bills on time, typically for six months to a year, they might be eligible for a credit increase.

A Student Credit Card Can Work for You

Students usually have lots of expenses at college. Although credit cards are not the best vehicle for paying for tuition, they are useful for small purchases such as gas or an occasional pizza. If students start using their student credit card for small purchases that they can pay off each month and on time, they establish a good credit record, which can serve them well after graduation.

Check Out the Offers

Credit card offers change constantly. If you are in the market for a student credit card, you need to check out the offers just before you are ready to apply. Besides only looking at the student credit card rewards that credit cards offer, you need to look at the other terms too, such as what the interest rate is and the late payment fee and policy. Here are some interesting deals offered in 2014 that were good deals for students. You can use these as examples of what to look for when you are ready to shop.

Discover it Student Card

What’s impressive about the Discover it student card is the 2 percent cash back rewards it offers on gas and restaurants, up to $1,000, each quarter. All other purchases you make on this card earn you 1 percent cash back. This card has no annual fee, no penalty interest rate (some card issuers raise the interest rate if you make a late payment), no late fee the first time, no over-limit fee and no foreign transaction fee, which comes in handy if you will study abroad. You can also see your FICO score for free with each monthly statement. You pay 0 percent interest the first six months you have the card, and then the interest rate will be between 12.99 percent and 21.99 percent, depending on your creditworthiness.

Citi ThankYou Preferred Card for College Students

The Citi ThankYou rewards card lets you redeem points for gift cards, travel or cash back. You get 2,500 bonus “ThankYou” points if you spend $500 within the first three months you have the card. You get two points, instead of the standard one point, for every dollar you spend on entertainment and dining. The interest rate is 0 percent for the first seven months; it then switches to a variable rate between 13.99 percent and 23.99 percent. There is no annual fee.

Journey Student Rewards from Capital One

The Capital One Journey card is a good choice for students with fair or limited credit because, after making five monthly payments on time, you can gain access to an increased credit line. This rewards card lets you earn 1 percent cash back on all purchases with no limits and no expiration dates. If you pay your bill on time, you get a 0.25 percent bonus on the cash earned, making the rewards really 1.25 percent cash back. You also get a free credit tracker to monitor your credit score. The interest rate is 19.8 percent, and the card has no annual fee.

Tip: A student rewards credit card benefits you most when you carry no interest on the card. Any interest you pay negates your reward. Use your card only for what you can afford to pay off at the end of the month to reap the full benefit of your rewards card. If you know you will carry a balance each month, choose a card with the lowest interest rate you can get, even if that means getting a student card that offers no rewards.

Credit Cards and Students Can Be a Dangerous Combination

A Time magazine article reported that people born between 1980 and 1984 carry about $5,500 more in credit card debt than their parents did at the same age. This is problematic, particularly if young people regularly spend more than what they earn just to get by. This often happens when students have a student credit card with no job.They will soon rack up so much credit card debt that they could still be paying it off as they approach retirement. Not only are young people getting into debt, they are paying if off slower than older age groups do, according to an Ohio State University study.

The Cost of Debt

If you know beforehand just how long it would take you to pay off your credit card debt, you might think twice about overspending. Let’s say you have a credit card and you used it during the month on various charges that totaled $1,000. Let’s also say the interest rate you pay on your card is 15 percent and your minimum payment is $20. If you never used your card again and just concentrated on paying off that $1,000 you spent in one month, and you make the minimum payment, it would take you about 6.5 years to pay it off, and you would have paid $579 in interest, more than half of what you spent.

Credit Report

If you miss payments or default on your debt altogether, a record of that behavior goes on your credit report and stays there for seven years. So a mistake you make at age 19 stays on your credit record until you are 26. If you want to take out a loan or rent an apartment during that time, you might be denied for being a credit risk. You might not get your dream job, either, if you have a bad credit report, because some employers might take that as a sign of bad character. If you are approved for a loan, you will probably have to pay a very high interest rate.

What You Should Do

It is beneficial to have a credit card. You can start establishing credit with one, and credit cards come in handy for emergencies. When you get your first credit card, take it easy. Don’t use it for a long-term loan, such as your student loan or for living expenses. Use it instead for small purchases that you can afford to pay off in full when you get your bill at the end of the month. If you did use your card for an emergency that you can’t pay off in full in one month, pay as much as you can. It’s never a good idea to pay only the minimum.