One of the most exciting parts of growing up is becoming financially independent, but learning how to do so can be challenging. Building good credit is a must: It will help you qualify for loans, auto insurance, rental applications, cell phone plans and can even impact job prospects.
How do you get started? The Credit CARD Act, most of which took effect in 2010, changed the rules of the game by banning credit card issuers from approving anyone under 21, without a co-signer or proof of independent income.
Basically, if you can't prove to the issuer that you have the means to pay your balances, you probably won't get a card. But with or without a credit card, it still all comes down to being responsible.
We asked several financial experts to explain how you can effectively build good credit. Here's what they recommend:
"I always advise parents when the student is going off to college, unless you're 100 percent sure they're responsible, the first credit card that student should have is yours," says Mike Sullivan, former director of education for Take Charge America, a Phoenix-based nonprofit financial education and consumer debt service organization.
Becoming an authorized user on a parent's account can help build good credit by "piggybacking," a controversial practice that FICO – creator of the widely used credit score bearing its name – continues to permit among family members.
Using piggybacking, if your parent has good credit, your credit will get a boost, with fewer risks associated with having your own credit card, since the primary account holder will be able to monitor spending.
Becoming an authorized user has long been a popular choice for students aiming to build good credit. But in the wake of the Credit CARD Act, it may now be the only choice for some.
2. Open up your own credit card.
If you can provide proof of income, it may be time to apply for a card in your name. But know that things have changed from the days when every college freshman's dorm mailbox overflowed with credit card offers and card issuers rained free pizza and T-shirts on students who applied.
In this post-Credit CARD Act era, most issuers are no longer clamoring to put a credit card in the hands of every college student. Some no longer offer student cards; others switched to pushing debit cards on campus.
Also know that when you receive a credit card that's all yours – one with no co-signers – the responsibility for handling the card wisely and repaying your debts falls squarely on your shoulders.
Once you're able to qualify for a regular card on your own, it's important to remember that not all credit cards are the same, says Clarky Davis, former spokeswoman for CareOne Credit Counseling, a debt relief service provider based in Columbia, Md. and formally known as the "Debt Diva."
Before you applies for a credit card, you "must do some research to find a card with the most benefits – a lower interest rate, no annual fees, reasonable credit limits and clear billing policies," says Davis.
If you think you might carry a balance, go with a no-frills, low interest credit card. A reward credit card may sound cooler, but the higher annual percentage rate (APR) and possible annual fee won't be worth it.
Sullivan says some students should consider starting out with a retail card. Retail cards come with fewer benefits and lower spending limits, but using this card and paying the bill regularly will build good credit.
Davis says those who can't qualify for a retail card will need a secured credit card, which is attached to a savings account. However, if you pay the bill responsibly and on time, you'll eventually qualify for a regular credit card. That includes student credit cards, products that are directly aimed at consumers who may lack significant borrowing history.
Since responsible card use and on-time repayments will help you build a good credit history, while also discouraging the bank from closing your account due to inactivity, don't just leave that plastic sitting in your wallet.
"Getting a credit card means you start a credit history and shows on your credit report that you have one account and no late payments," Sullivan says. "But if you really want to start credit, you have to use the card."
One way to do that? Consider putting small, recurring charges on your card: Think of regular expenses, such as groceries or montly subscriptions (like Netflix), that you won't have trouble repaying at the end of the month.
"A credit card is a valuable financial tool. However, students must be able to manage their credit card responsibly to benefit from using the tool," Davis says.
Keeping your debt levels low will ensure that if there is an emergency, you'll still have plenty of your credit line accessible. So, if your tire blows out or your cell phone falls in the toilet, you can purchase a replacement without exceeding your credit limit.
When you are first building good credit, do your best not to carry a balance on the card. Use the card only for purchases you can afford, and pay off the balance at the end of each month. What if you can't? You are living beyond your means and shouldn't be making those purchases.
"A student should only have a credit card if he or she has a job or some sort of income to support this financial tool," Davis says. If you carry a balance, you will owe interest fees.
Why pay a fee if you don't have to?
Think only your credit card affects your credit? That's how it used to be, says Sullivan, but "right now, there are a lot of folks, including credit bureaus, who are developing alternative credit scores for no-file people, which includes lots of young people. They're giving some credibility to utility payments."
In 2018, one of the three major U.S. credit bureaus, Experian, launched Experian Boost. If you grant Experian permission to your bank account, this platform will report moble phone and utility payments – which could give you more control over your credit score.
Sullivan says other dues, such as taxes and library fees, can make a difference, too. He has seen students whose credit has been ruined because they failed to pay a traffic fine. Davis agrees: "Paying all your bills – from apartment rent to your Internet service – consistently and on time is essential."
Just like you may need an adult co-signer to get approved for a card, your under-21 friends will, too. To help them get approved for a card, some of these friends may approach you to become a joint account holder. "I have found that some students are getting older students (fraternity brothers, etc.) to co-sign. That is quite dangerous," Sullivan says in an email.
Consumer experts have a tip for you: Don't. That's because when a friend slips up – by taking on too much debt or missing payments to the bank – the co-signer can quickly see their own credit ruined.
"You not only become liable for everything charged if your friend decides not to pay, but it could blemish your own credit record," says Edgar Dworsky, founder of the website ConsumerWorld.org.
Making your friend an authorized user also poses risks. Once again, their mistakes can hurt your credit, although – unlike when you co-sign on a card – an authrorized user can be easily removed from the account.
Now that you have credit in your own name, don't go wild. If you apply for too much credit in too short a period of time, your credit score will fall. If you have built up strong credit over several years, it will hurt you less.
"But if you have barely established credit and apply for multiple cards, it can lower your credit score significantly," Sullivan says.
One credit card should be enough for most college students, he says. How many cards should you have? "To prevent excessive credit card debt, it's better for consumers to have as few credit cards as possible. Having just one card is ideal for most students," Davis says.
"Students should view their student loan as a great way to cultivate important habits that will help them build and maintain good credit," Davis says. If you use them correctly, that is.
Sullivan says he sees a lot of young people take out student loans to buy cars and other noneducation items. "Manage your loans by only borrowing what you need to go to school -- that keeps the balance down," Sullivan says. "When you get out of school, be prepared to consolidate when appropriate."
Davis and Sullivan agree that the real key to keeping your loans healthy is to make at least the minimum payment every month and do it on time. Davis recommends paying more than the minimum to pay the loan off faster, and emphasizes that payments should be received by the creditor on or before the due date on the statement to keep the account in good standing.