Tag: Student Credit Card

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College Students and Recent Grads

7 Ways for College Students to Build Credit

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Ways for students to build credit in college
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College is a great (read: strategic) time to work on building a credit score from scratch. If you work on building credit while in school, you could graduate with a healthy credit score in the high 600s to mid-700s.

Coupled with a solid starting salary, graduating with a good or excellent credit score puts you in a great position to rent your first house or apartment and, eventually, make larger purchases like a new car or a first home. On top of that, you’ll qualify for the best terms when it comes to borrowing personal loans or opening credit cards.

How to build a positive credit history

Here are a few inexpensive things you can do to bulk up your credit report and build your credit score before graduating from college

#1: Learn how to use a credit card — the right way

You can start working on your credit score by opening a student credit card with a bank or credit union. Having a credit card can be risky — there are plenty of stories of students overspending or seeing their credit limit as “free money” — but opening a student card also gives you an opportunity to learn good credit-building habits. Here’s a simple strategy for building credit with a student credit card:

  1. Charge only a recurring bill like a phone bill or monthly streaming subscription to the card.
  2. Set up automatic payments to pay off the credit card bill on time and in full each month.
  3. Rinse and repeat for four years.

When selecting a credit card, you’d ideally choose a credit card that doesn’t charge an annual fee. You shouldn’t use the card for anything other than the recurring bill — and, if absolutely necessary, the occasional emergency. The recurring bill should ideally be less than 30 percent of a your total available credit. (Using as little as possible of your available credit helps you get a good credit score.)

Eventually, your credit score should reflect a history of consistent, on-time payments and will likely be in the good or excellent range. These are some of the best student credit card offers available now.

Con: High interest rates

While credit cards generally carry high interest rates across the board, student credit cards tend to have some of the highest APRs. The rate is high because students don’t usually have much credit history, so lenders see them as risky borrowers and charge a higher interest rate to compensate for the risk.

Pro: Build credit without debt

Using the strategy described above — making a small purchase and paying it off each month — you can establish a healthy credit history without paying a cent of interest. Assuming you pay the bill on time and you’re using the card to buy something you’d purchase anyway, there’s no cost to this approach of building credit.

Con: Low limits

Limits on student credit cards are generally pretty low, as banks want to minimize risk of lending to an inexperienced borrower. A low limit makes it pretty easy to use more than the suggested 30 percent of one’s total credit limit. For example, 30 percent of a $500 limit is $150 — basically the cost of a textbook.

Pro: Access to an unsecured line of credit

Having a credit card gives you a line of credit to borrow from when you need to. This can be helpful if you can’t immediately cover all of your personal costs like books, food or an emergency. The student credit card is also unsecured, meaning the student won’t have to make an initial deposit to open the line of credit.

Con: Easy to make credit mistakes early on

A credit card comes with a lot of responsibility. Having a credit card can make it really tempting to spend more than you can afford (which results in expensive debt) or use a lot of your credit limit (which can hurt your credit score). Be prepared to exercise a lot of self-control if you get a student credit card, because it can take years to undo the damage caused by irresponsible credit card use.

#2: Become an authorized user

If your parent has good credit history, ask them about becoming an authorized user on their credit card. When you become an authorized user, your parent’s behavior with the credit card will be reported like it was your own.

Pro: A passive way to build credit history

If you use this tactic, you can build credit history while never having to actually apply for credit yourself.

Con: It’s not guaranteed to help

Not all credit card issuers report authorized user accounts to the credit bureaus, according to Experian. On top of that, not all credit scores look at authorized users the same. There are dozens of credit scores, each with their own algorithms, and some may not give an authorized user much weight in determining a score, according to Experian.

Con: Could easily backfire

While authorized users are not liable for debts on the account, missed payments or high credit card balances on the account could hurt you. If that happens, you can either file a dispute to have the negative information removed or contact the card issuer and ask to be removed as an authorized user on the card.

#3: Get a co-signer

You can thank the 2009 Credit CARD Act for making it more difficult to get a credit card before you’re 21. The CARD Act stopped companies from marketing credit cards to students on college campuses and made it so people who are younger than 21 must either have a co-signer, such as a parent or a guardian, or have an independent source of income to qualify for a credit card.

Pro: Allows a student who can’t qualify on their own to open a credit card

Lenders generally consider it risky to hand a line of credit to a college student with little or no credit history. By requiring a co-signer, lenders transfer part of this risk to someone else, giving you an opportunity to build your credit you may not have had on your own.

Con: Puts a co-signer at risk

If you go with a co-signer, you need to be very careful to only charge what you can afford to pay off in full each month. Both you and your co-signer’s credit scores will take a hit from any negative behavior like missed payments or high credit card balances. Asking someone to co-sign a credit application is no small request and can affect your relationship with that person. Be sure to set ground rules for the arrangement before agreeing to it.

#4: Get a secured credit card

If you’re unable to get approved for an unsecured credit card, you can try opening a secured credit card instead. A secured card can help prove your responsibility to lenders without a lender taking on much risk. You’ll have to put down an initial deposit in exchange for access to a line of credit on the card. Typically, the line of credit will equal the amount of the deposit. You can check out our roundup of the top secured credit cards for people looking to improve their credit scores.

Pro: A better shot at approval

Because the required deposit lowers a lender’s risk, you have a better shot at getting approved for a secured credit card over an unsecured student credit card.

Con: A required deposit

You will likely have to come up with $100 or more to put down as a deposit before a credit card issuer will approve you for the account. If you miss a payment, the lender can take your deposit. And because the deposit will likely serve as your credit limit, you won’t have much room for spending if you want to reap the credit-score benefits of using little of your available credit.

#5: Get a credit-builder loan

You can get credit-builder loan through banks and credit unions. When approved for a credit-builder loan, your loan is deposited into a savings account, but you can’t access the money until you’ve paid back the loan.

A credit-builder loan is good for students who want to build credit but don’t want to risk overspending on a credit card or using a credit card irresponsibly. Credit-builder loans are secured loans, so they often have lower interest rates than credit cards, too. The loan also gives you the advantage of making equal, periodic payments so you aren’t caught off guard when a bill arrives.

You can find a credit-builder loan account through a variety of lenders. For example, online-only lender Self Lender specializes in credit-builder loans, but they’re common products at credit unions as well. Research a variety of options and compare borrower requirements, as they vary from lender to lender.

Pro: No deposit necessary

You won’t have to come up with any money upfront to open this secured line of credit. You will, however, need to make periodic, on-time payments to effectively build your credit history.

Con: No access to the line of credit

You won’t have access to the funds from a credit-builder loan right away. This could become an issue if you suddenly need money. If you want to access the money, you must first finish paying off the loan to the lender.

Con: Fees

Some credit-builder loans come with fees, making this a potentially costly option for building credit.

#6: Stay on top of student loan payments

If you have student loans, repaying them will be a crucial part of your credit history. After graduation, you can easily hurt your credit score by missing a student loan payment. Many student loans have a grace period of six months after graduation, meaning you won’t have to make payments during that time. If you’re not paying attention to when that grace period ends, you could easily miss your first payment and hurt your credit score.

A missed payment can cause your credit score to drop significantly and stay on your credit report for years, which can be seriously harmful to someone just starting to build a credit history.

Credit-building tip: You don’t have to wait until your loans come due to start making payments. If you can afford to start paying your student loans while you’re in school, you can save money in the long run, and you don’t have to wait until you graduate to establish a positive payment history on your credit report. This could give you a head start on getting out of debt and building your credit before entering “the real world.”

Keep an eye on your email inbox and physical mail for information from your loan servicer (the company to which you make loan payments) regarding your first student loan bill and be sure to make your payment. Continuing to make on-time payments on student loans will help you build a good credit history.

If you can’t afford the student loan payments and have federal loans, you can learn all about how to enroll in an income-driven repayment plan here. Enrolling in an income-driven plan can reduce or eliminate your required student loan payment, making it easier to stay on top of payments and avoid credit damage.

#7: Build credit with a rent payment

If you rent an off-campus apartment, you can build your credit history by simply paying rent on time, if it’s reported to the major credit bureaus. Students should ask their landlord or property manager if their rent payments are reported to Equifax, Experian or TransUnion.

If the rent-taker doesn’t report the payments, you can ask them to sign up for a rent payment service like PayLease or RentTrack that will let you pay rent online and give the landlord the option to report the payments to the bureaus. The rent payment information will be included on a standard credit report and can help students build good credit history without ever opening a line of credit.

Pro: Build credit with money already intended to spend

You’re already spending money paying rent each month, so why not make that payment serve both your housing and credit-building needs?

Con: Some landlords may not agree to report payments

Many landlords check credit scores when a tenant applies, but not many report regular, on-time payments to the big three credit bureaus. Getting your landlord to switch to (and pay for) a payment service they aren’t familiar with might be a long shot, but it’s worth asking.

Con: Not all credit scores factor in rent payments

This isn’t a sure-fire way to build credit, as not all credit scoring models include rent-payment history. The same goes for utility payments: They could help you build credit, but they may not. If you’re looking for a certain way to work on your credit, the other strategies in this article make more sense.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Here’s the Right Way to Use a Student Credit Card

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Here's the Right Way to Use a Student Credit Card

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:

  1. 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.

  1. 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 Citi ThankYou Preferred Card for College Students, and Capital One Journey.

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.

  1. When you get your card, figure out what 20% of your credit limit is. Example: 20% of $200 is $40.
  2. 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.
  3. Set up your account to take the payment from your credit card each month.
  4. 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.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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