Credit cards can be a great way to build your credit while in college. But if you aren’t careful, they can quickly turn into a seductive debt trap, sending you down a path to poor credit.
If you are an inexperienced borrower, you could easily spend more than you are able to comfortably pay back each month and end up in delinquency or being hounded by debt collectors. You also run the risk of ruining your credit score before you really need it for important purchases after college.
If you’re ready to start building your credit, then that’s great. Before you do, you should get a good idea of what you’re getting yourself into before you apply for a credit card.
What Is a Student Credit Card?
A student card is a credit card specially designed by a lender to get college students started with credit. It helps them build a relationship with customers early on and helps you build your credit score.
The major difference between a student credit card and a regular credit card is that the student card will likely have a higher interest rate. That’s because the bank has no way to prove you are a reliable borrower yet since you have little to no credit history. Regular cards tend to average about 15% annual interest. In a recent MagnifyMoney study, we found the average student credit card carries an interest rate of 21.4%.
Why Should I get a Student Credit Card?
Your goal with your student credit card is to build your credit so that by the time you graduate, you have a healthy credit score in the high 600s to mid 700s. That way, when you graduate, you’ll be in a great position to make larger purchases like a new car or your first home. At that point you may actually want to earn rewards, and you’ll qualify for the best cards because you have a great score.
Many people look to credit when they need extra money.
However, you should only get a credit card if you want to build your credit score, not because you need extra money to make ends meet. This is important, so we’re going to repeat it again: You should only get a credit card if you want to build your credit score, not because you need extra cash to make ends meet.
If you can’t afford your monthly expenses as it is, a credit card might only make things worse. When you take out a credit card, you are paying a company to lend you money for a short while. If you can’t afford to pay the full balance on your card before your bill is due, the bank or credit card company will charge you interest.
Let’s say you charged $300 to your student card for books at the start of the semester. If you made a minimum monthly payment of $9, it would take four years and four months to pay off a card with a 21.4% annual percentage rate (APR). At that point you would have paid a total of $460, assuming your books were your first and only charge on the card.
Choosing Your First Credit Card Wisely
Because you likely have little or no credit history, your main goal with a credit card should be to build your credit score. There are two main criteria you should look for when shopping for your first credit card:
- No annual fee
Choose a card that has no annual fee, first and foremost. You shouldn’t worry about finding a card with the best rewards or even the best interest rate. You’re not getting a card for the perks, and since you don’t have much credit history, a low APR isn’t really an option for you right now.
You just need to make sure that the card won’t cost you anything annually to build your credit. Carefully read the fine print. Some lenders may waive the fee for a period, then start charging you.
- Easy to set up auto-pay
This next point is almost as important: look for a card that has an online platform that makes it easy to set up automatic payments. This will make it easy to make sure you pay your bill each month.
Three no fee options with well rated smartphone apps for easy payments are The Discover it for Students Card, Citi ThankYou Preferred Card for College Students, and Capital One Journey.
Discover even gives you your free FICO credit score and offers perks like $20 back annually for customers who maintain a 3.0 GPA.
Your limit may not be very high as a student, but that’s fine because this card is for practice and to build your score. Your limit will likely land somewhere between $500 and $2,000.
The key is to make all your payments on time, and in full each month, which is why having a reliable smartphone app from your credit card provider is so important. Otherwise, penalty interest rates on these card are 29% or more.
You may also want to check with your parent’s credit union to see if they have a student credit card. The mobile apps aren’t always as easy to use for payments, but they can have lower rates in case things go wrong and many credit unions allow parents to cosign for students under 21.
Justice Federal Credit Union’s student card has a 0% rate for 6 months, and a fixed 16.9% APR afterward with no annual fee. It allows parents to co-sign and anyone can join Justice credit union by becoming a member of the Native Law Enforcement Association for $15. You can apply for the card before you take care of membership formalities.
Since the implementation of the Credit CARD Act in 2010, lenders have been barred from promoting student credit cards on college campuses. As a result, the number of student credit card accounts have fallen by more than 60%. The Consumer Financial Protection Bureau found in its 2016 Campus Banking Report that lenders and institutions have shifted their partnerships to checking accounts or prepaid debit cards loaded with fees instead.
Using Your First Credit Card
Focus on making consistent, on-time payments, and keeping your credit utilization — that’s how much of your total credit limit you use — as low as possible. You should aim to use no more than 20% of your total limit. For example, if you have a credit card limit of $500, you should never charge more than $100 at a time to your card.
On-time payments and utilization make up 60% of your credit score, so it’s a big deal to miss a payment or max out your card.
Automation makes it very, very easy to achieve both these goals.
- When you get your card, figure out what 20% of your credit limit is. Example: 20% of $200 is $40.
- Find something that you pay for each month that costs less than that. This might be a payment for a streaming service such as Hulu, Netflix, or Spotify.
- Set up your account to take the payment from your credit card each month.
- Set up your checking account to pay your credit card balance each month.
After you set up all of the payments, you can forget about using your credit card. The automation is doing all of the work for you. Stash it somewhere safe (not your wallet) so that you won’t be tempted to use it.
Sit back and watch your score grow with free tools such as Credit Karma or the Discover Credit Scorecard. By the time you graduate, you should easily see your credit score in the high 600s or mid-700s.You’ll also have demonstrated your self-discipline and responsibility to banks, and will have an easier time getting a loan for a car or mortgage.
5 Other Ways to Build Your Credit Score
There are plenty of other ways to build your credit score if you aren’t quite ready to take on the responsibility of a credit card.
Become an authorized user on your parent’s credit card
Ask your parent to add you as an authorized user on one of their credit cards. If you are an authorized user, the behavior on that card (spending, payments, etc.) will be reported on your credit report as if it were your own, helping you build your credit. This strategy could also backfire. If your parents don’t use credit responsibly, it could hurt your credit score in turn. Negative behavior — even if it isn’t yours — will be reported as if it were yours as well.
Get a secured credit card
A secured card is a simple way to start building your credit history. This card can help prove to lenders you can be responsible without a lender having to take much risk. You’ll put down a deposit, and the lender will give you a line of credit. Typically, your line of credit will equal the amount of your deposit.
Get a co-signer
If for any reason you don’t qualify for a credit card on your own, you might be able to ask someone to co-sign the agreement with you. Big banks generally don’t offer this, but some credit unions like the Fort Knox Credit Union allow parents to cosign for students under age 21.
That means that they will be responsible for the payments if you can’t pay them. If you go this route, you’ll need to be very careful to only charge what you can afford to pay off each month. If you miss payments, it will negatively affect both of your credit scores.
Get a credit-builder loan
A credit-builder loan is similar to a secured credit card, but it requires no down payment. These loans are typically only offered by community banks and credit unions. When you are approved, the bank will deposit your loan in a savings account for you. You can’t access it until you’ve paid the loan back, however.
Build credit with rent payment
Paying your rent on time can help you build your credit score if it’s reported to the bureaus. Ask your property management company or landlord if they report rental payment data to Experian, TransUnion, or Equifax rental bureaus.
If they don’t, you can ask them to either start reporting or you can sign up for a rent payment service like PayLease or RentTrack that will let you pay for your rent online and give you the option to report your payments to the bureaus. The rent payment information will be included on your standard credit report and can help you build a score without a credit card.
A Final Word of Advice
We had to add this, because we know you just love it when a professor keeps talking after the lesson is over. But really, this is important so pay attention.
If you don’t think you have the self-discipline to handle a credit card right now, then don’t get one. College is full of opportunities to be a present hedonist — to say YOLO — and having a credit card can make it tempting to spend money you don’t really have.
Rebuilding your credit takes a long time and can get very expensive. It’s not worth ruining your credit score, and it will make it a lot harder to make those larger purchases when you graduate. If you can’t be disciplined enough to keep your utilization low and make your payments on time, then don’t get a credit card. You will have plenty of opportunities to build your credit after college.