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Updated: November 11, 2017
If you have never had a credit card, it can be a daunting experience. The idea of a revolving loan can give you pause. What are the rules of these financial products? How do you make sure you don’t go deep into debt?
Here’s the first step to better understanding cards: If you look at credit cards as a tool to build credit or for convenience, they aren’t so overwhelming.
There are a number of products out there for the new consumer, including student cards and secured credit cards. We’ll explain how they work, which is best for you and why you should care about your credit and credit cards.
Here are how credit cards work: You’ll get a credit limit, say $1,000, which you need to make sure you don’t go over. You can use that limit to make purchases, cash advances or balance transfers. Then, you’ll have a due date when you need to pay a minimum amount. If you don’t pay in full by that date, the balance carries over, and you are charged a hefty interest rate (the national average is over 16% APR right now). That’s why you want to pay in full each month. If you have a $500 balance and you pay the minimum due, it will take you 27 months to pay it off, and you will pay $153 in interest fees. There can also be an annual fee, so be mindful of that. Finally, you can be charged late charges, over-limit fees, and you can even lose the privilege of having the card if you don’t abide by the rules. That’s why it’s important to read the rates and fees link on the card’s landing page.
From student and credit builder to cash back and balance transfer, there are myriad cards out there. With them, you can improve your credit, save money and enjoy the convenience of plastic. Here are the major types of credit cards:
These cards are a good option for the consumer with a thin credit file, which means you don’t have much of a credit history. A few have cashback benefits, and many have features for organizing your budget. For example, the Discover it chrome for Students allows you to earn 2% cash back at restaurants and gas stations on up to $1,000 in combined purchases each quarter.
Designed almost entirely for credit building, these cards are ideal for someone with bad credit who needs to reset his finances. By paying a refundable deposit of say, $200, you basically borrow off of that money with a credit limit that usually matches the deposit. For example, with the Discover it Secured Card, there is no annual fee, and your account is reviewed after 8 months to see if you can transition to an unsecured line of credit, meaning no deposit is needed.
This card is a good segue into the world of rewards cards. With these cards, you can get a signup bonus up to $300 and enjoy cash back for specific categories or for all purchases. There is often no annual fee. For example, with the Wells Fargo Cash Wise, you can earn $200 after a $1,000 spend in the first 3 months, and 1.5% cash back on almost every purchase.
These cards vary widely, from loyalty brands to flat rates for all purchases. More complicated than cash back, this is a good way to save hundreds of dollars a year – provided you are reasonably organized. There is usually an annual fee, although that can be worth your while if you plan to make it your go-to card. For example, the Chase Sapphire Preferred has an annual fee of $95 after the first year, but you can earn 2X points on travel and dining at restaurants worldwide, and there are 50,000 bonus signup points after a $4,000 spend the first 3 months of account opening that can become $625 toward travel when you redeem through Chase Ultimate Rewards.
Count on a hefty annual fee with these cards, but the benefits can make it worthwhile if you are a frequent traveler.
If you have already incurred credit card debt, this kind of card can be a good way to avoid the crushing interest charges of carrying a balance. Most have balance transfer fees, although the Barclaycard Ring does not.
In some ways, the student credit cards are indistinguishable from other cards. They can have cash back, budget management tools, no annual fee and other features. For example, the Citi ThankYou Preferred Card for College Students allows you to earn 2,500 bonus signup points after a $500 spend within the first 3 months of account opening, which can be used for $25 on gifts cards, electronics and other rewards when redeemed at thankyou.com. However, good credit is needed, unlike other student cards. In the case of the Discover it student cards, it pays to be a student -- you get a bonus of $20 each year for five years if your GPA is 3.0 or higher. These cards accept consumers with fair credit. Most student cards offer free text alerts to help you keep up with payment due dates, and many offer free credit scores.
It’s a tricky question of how old you need to be to apply for a credit card. You can be under 18 and get signed on as an authorized user, but you have to be at least 18 to legally sign a contract, which means you can’t have your own card until then. However, the CARD Act stipulates that if you are under 21, you have to have a co-signer or have an income. The thing is, there are few card issuers that allow co-signers. If you don’t have a job, your best bet is to have a parent add you as an authorized user, which will help you build credit, but you won’t be legally responsible for the charges. Just be sure to check with the card issuers that they will send the card’s good credit habits to the credit bureaus’ file for the student.
You may need a co-signer, but not necessarily. The CARD Act, which was signed into law in 2009, has protections in place for consumers under 21 years old, because previously, there were issues with college students signing up for credit cards and incurring large amounts of debt. Today, if you don’t have an income, you will likely need a co-signer to get your own card. However, most banks don’t allow co-signing, but that’s not necessarily a bad thing. Both co-signers are responsible for the debt, and it can be tricky to get a co-signer removed. There is another option, though. If someone adds you as an authorized user, you have the privileges of having a credit card and the benefits of the cardholder’s good credit habits, but you can be removed at any time and you are not responsible for the debt.
Putting your student on your card as an authorized user is as simple as a phone call. However, make sure the card’s good credit habits will be sent to the three major credit bureaus for the student’s file. That ensures that they benefit from your on-time payments. Don’t sign the student on as an authorized user unless you have stellar credit, and establish ground rules for purchase and payment habits. For example, only allow purchases in emergencies, and make sure they alert you when they’ve used the card. The nice thing about authorized users is that you can easily take them off of your account, unlike co-signers or joint account holders. One card, the Chase Sapphire Preferred, actually gives you 5,000 points when you sign on your first authorized user and a purchase is made within the first 3 months of card membership.
Right out of the gate, you need to build your credit. Cellphone companies, auto insurance businesses, landlords – they all care about your credit. So, it isn’t just an issue of getting an auto loan with a good interest rate. In most aspects of your life, good credit is needed. Even when you start applying for jobs after college, your credit may be looked at.
The good news is that it is pretty easy to build your credit. The easiest and fastest way to build credit is with a credit card. Just pay on time and in full each month, and your credit score will climb in no time. Even if you have a thin credit file, you can likely find a card that suits you. You can try a secured card, which requires a refundable deposit, or a student card, which often caters to the consumer who doesn’t have a robust file.
Your credit report is the accumulation of credit behavior in the last 7-10 years. Your credit score is a measurement of the data from the credit report.
Don’t let the 7-10 years worry you, though. A consumer new to credit can obtain a good credit score within months of good credit habits. Here’s how it works:
Lenders send your credit data to the three major credit bureaus, TransUnion, Experian and Equifax. Each bureau generates a report, which includes personal information, such as your name and past addresses, your accounts and whether you paid bills on time.
FICO, the dominant score, uses a formula with 5 major components, including on-time payments, a debt-to-available-credit ratio, and other credit habits. The data for the components come from the credit reports. The FICO credit score is the scoring model most used by lenders to assess your lending risk.
You can access your TransUnion credit report for free on CreditCards.com, or on the one site directed by federal law to release the 3 reports for free: AnnualCreditReport.com.
You are legally allowed to access each report for free once a year. Some credit experts recommend that you pull one of your reports every 4 months, staggering the requests.
AnnualCreditReport.com will ask for personal data, such as your birthdate and your social security number; ask you to choose which credit bureau’s report you want; then ask you a series of detailed questions only you would know, such as payment amounts for past loans, past addresses and other information. It helps to have this information handy when you pull a report. If you answer incorrectly, you may be shut out of the system for that bureau, and you may have to apply by snail mail.
The reports are compiled by the 3 major credit bureaus, TransUnion, Experian and Equifax, using data collected from lenders. They include personal information, such as your name(s), past addresses and payment history.
Check the report thoroughly for inaccurate information, such as unknown accounts. Request that the bureau correct any inaccurate information, preferably by snail mail, so that you don’t lose any negotiation rights.
Credit is determined by how you have handled your file over the years. If you have missed payments or even just don’t have a lot of information in your file, your credit may not be great. While credit scores want you to have a credit history, something you can’t really control in the early years, there are some things you can do, such as paying on time and in full every month, and being careful about how often you try to take out credit. Specifically, FICO looks at:
A college student needs a credit card because the easiest and fastest way to build credit is with a card. That doesn’t mean a card is necessary, just that it makes your life easier. However, having a credit card isn’t enough. It’s how you use the card that matters. Whether it is a student card or a secured card, it’s important that you pay in full and on time each month, and that you are careful about taking out credit products. That means don’t apply for multiple credit cards in a short time span, because that’s one of the components of your FICO score. And paying on time and in full? Those are the two most important elements of your score. Finally, put a small recurring charge on your card, remembering to pay it off each month. That keeps the account healthy and active.
There are only about 10 student cards out there, and they can mimic other more “adult” cards. That said, a student card can welcome a consumer with a thin credit file and even no credit. For example, the SelfScore Achieve for International Students doesn’t require credit or a deposit, and you can build your credit in the U.S. with it. There are also the Discover it chrome for Students and the Discover it for Students, both of which reward you for having good grades. Before you settle on a card to apply for, check your credit score for about $20 at MyFICO.com or get your Vantage score for free at CreditCards.com. Then, select the card you will most likely be able to get, based on your score, and only apply for that card. If you apply for multiple cards, you can harm your credit, because lenders can interpret multiple credit pulls as a desperate bid for cash.
Follow these 5 action items when choosing a student card:
Using your new student card is actually pretty straightforward. Just pay in full and on time each month. By paying in full and on time, you are improving 65% of your FICO score. If you don’t have the money for a charge, don’t make the purchase. But don’t put your card in a sock drawer. Put a small charge on the card every month to keep the account active. Also, as time goes by, you are improving another 15% of your credit, because length of credit history is monitored as well. Finally, resist the urge to take out another card until you have a firm handle on your student card.
8 tips on how to use your new student credit card:
You can get a student card with no credit, but it’s important to know where your credit stands before applying. That’s because each card is different, requiring from good credit to no credit.
Pull one of your credit reports for free through AnnualCreditReport.com or get your TransUnion report for free through CreditCards.com. They are pretty much the same – personal information, history of payments, and accounts past and present. They are compiled by the three major credit bureaus: TransUnion, Experian and Equifax. If you have a credit file, then check for inaccuracies, both in your personal information and in the accounts. Alert the credit bureau of any inaccuracies, and they will notify the other two.
Now, check your credit score for $20 at MyFICO.com, or you can check your Vantage score for free at CreditCards.com. Only apply to a card you are reasonably sure you will get, and don’t apply to multiple card issuers, because FICO doesn’t like that. It can be a signal to lenders that you are desperate for cash.
Which credit card you choose is an individual decision, but know that the options can seem endless. However, if your credit file is thin or you have bad credit, your choices can be limited. Also, you might want to choose a straightforward product for your first card, and a student card can get you there. There is also the option of a secured card, which means you put down a refundable deposit in exchange for a credit limit. No matter which card you choose, make sure the card issuer reports to all three major credit bureaus so that your good credit habits are being recorded. That way, FICO is recognizing your good behavior with a great credit score.
In many ways a student card is the same as other cards. However, a student card is more likely to accept fair, bad or even thin credit. Also, the Discover it student cards reward you for having good grades, which is handy. Otherwise, you can get a student card with cashback benefits like “adult” cards, and you can avoid annual fees and even foreign transaction fees in some cases. Student cards are a good first credit product, although you can also get a secured card if you have credit, but it’s not its best. With a secured card, you put a refundable deposit down.
Student cards have a few advantages, depending on the card. If you want to be rewarded for good grades, the Discover it chrome for Students and the Discover it for Students both give you $20 cash back each school year that your GPA is 3.0 or higher for up to the next 5 years. Otherwise, student cards are very similar to the more “adult” cards, some with benefits, such as the Citi ThankYou Preferred Card for College Students, which allows you to earn 2X points on dining out and entertainment and 1X point on everything else. Make sure you read the rates and fees link on the card’s landing page, though, for any hidden charges.
If you are planning to study abroad, there are several student cards that offer no foreign transaction fees, including the Discover it for Students, which accepts consumers with fair credit. Without this feature, you can easily pay 3% on foreign transactions, which can add up quickly. Another card, the SelfScore Achieve for International Students, accepts consumers with no credit. This card is valuable for the foreign student, because a Social Security number is not required, and there is even an introductory 0% APR for the first 6 months. A U.S. bank account with sufficient funds is needed. In all of these cases, you want to make sure you have a permanent U.S. address, because that’s a requirement for U.S.-based card issuers, although there are services for this, such as US Global Mail, which provides a U.S. address, and scans and forwards your mail to you.
There are several student cards that offer rewards, notably the Discover it student cards and the Citi ThankYou Preferred Card for College Students.
The Citi ThankYou card offers 2,500 points after a $500 spend within the first 3 months of holding your account. That translates into $25 for gift cards, electronics and other rewards when redeemed at thankyou.com. This card also offers 2X points for each dollar spent on dining out and entertainment (restrictions apply), with 1X point on everything else.
The Discover it chrome for Students offers 2% cash back on restaurants and gas stations for up to $1,000 a quarter, which means you could earn up to $20 a quarter or $80 for the year. Also, this card has a double cashback deal, which means that $80 turns into $160 at the end of your first year of card membership.
The Discover it for Students also has the cashback match deal, but with a twist. Earn 5% back on quarterly categories such as Amazon.com, restaurants, ground transportation and more for up to $1,500 a quarter, then get double back at the end of your first year. That means you can earn $75 a quarter, coming to $300 for the year, then another $300 at the end of your first year, bringing your cash back earned to $600. You also get unlimited 1% on everything else, plus the match of another 1% at the end of your first year.
Both Discover it cards offer $20 a year for up to 5 years for good grades.
Student cards with rewards can require a little better credit (fair or better), but you can find one that welcomes consumers with limited credit.
Even if you have bad credit, there are student and other credit-builder cards that can help you build your credit and even earn rewards. For a student card that requires fair credit, with the Discover it chrome for Students you can earn 2% back at restaurants and gas on up to $1,000 in combined purchases each quarter. This card also matches your cash back at the end of your first year of card membership. Also, you get $20 back each school year your GPA is 3.0 or higher for the next 5 years. If you need a card that’s a little more forgiving, the Credit One Bank Cash Back Credit Card accepts consumers with bad credit, and there’s a 1% cash back opportunity. Whichever card you use, check if there’s an annual fee, and confirm that the card issuer will send your payment history to the three major credit bureaus.
According to a CreditCards.com survey, there are 10 student cards now, compared to 16 in 2014. And in some cases, student cards mirror other versions of an issuer’s lineup. That said, student credit cards offer a number of features that can be a good choice for you. Here are 4 questions you need to ask yourself when assessing whether a student card is right for you:
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