Five lessons for students ready to apply for their first credit card
If you’re a young adult enrolled in college and hoping to declare your financial autonomy with a personal piece of plastic, a student credit card may help. Many credit issuers offer them, and they’re designed specifically for those new to credit.
Before rushing out to apply, however, take a crash course in the purpose and function of student credit cards. Here’s what you need to know about these unique products, in five easy “A” lessons.
Lesson 1. What’s a student credit card?
Student credit cards are marketed primarily to people in school who have not yet had a credit card in their own name. They can be a great way to solve the “you can’t get credit cards without having a credit history” problem.
Why would credit card issuers take a chance on a person who has not yet proven to be creditworthy? Future customer loyalty. A 2017 CreditCards.com survey on credit card loyalty found that 38 percent of respondents had not changed cards in at least 10 years. Such dedication is attractive to any business.
Video: 4 ways students can build credit
For students, the benefits include being able to charge purchases and establish a positive credit history before leaving school, which can help when trying to secure an apartment or a car loan. Additionally, student cards are usually unsecured. While secured credit cards are available to credit newbies, a cash deposit is required to get one. The collateral makes the accounts much less risky for issuers, but if you’re a penny-counting student, tying up even a few hundred dollars can be prohibitive.
To reduce the lending risk associated with unsecured accounts – and to help new cardholders become successful borrowers – many issuers include a financial education component with their student credit cards. Such resources fill a necessary gap. According to a 2017 U.S. News survey of card-carrying college students, 44 percent were never taught how to use or manage credit cards before they got them.
“We really want to help students better understand how credit cards work,” says Betty Riess, spokeswoman for Bank of America, which offers a number of student credit cards. “Education reduces mistakes. That’s why we have a partnership with Khan Academy. It includes tools on topics like using credit wisely, how to build credit.”
Some credit issuers even provide special incentives to student cardholders who excel in school. As of July 2017, for example, the Discover it® Student Cash Back and Discover it® Student chrome cards give students with GPAs of 3.0 or higher a $20 statement credit (up to 5 years) as part of Discover’s Good Grades Reward program.*
Lesson 2: How to qualify for a student card
To be eligible for a student credit card, you have to fulfill a few basic requirements. The most obvious: Most lenders make it a requirement that you be a college student. On the application you’ll see a space to list your school’s information. Will the credit card issuer investigate? Maybe not, but if you lie, you’re committing fraud. Don’t do it.
Age is another factor. You’ll have to be at least 18 years old, since minors can’t enter into a legally binding agreement without an adult’s signature.
Lastly, to be the sole account owner, you’ll need to possess or earn enough money to support yourself. It’s the law. The federal Credit CARD Act of 2009 stipulates that “any credit card applicant under 21 years of age must demonstrate his or her independent ability to make payments on the account or have a co-signer who is 21 or older with the ability to make payments.”
So, get to work. “It could be a summer job, part-time job, anything like that,” says Reiss. “It can’t be student loans, grants or scholarship money, though.”
Lesson 3. How to wield a student card powerfully
Bill Pratt, vice president of Money Professors, founded by three personal finance college professors to teach college students about money and credit, advocates for early credit adoption.
“Not borrowing any money is not a good thing because you can’t build a credit history without it,” says Pratt. “You have to prove to lenders that you can borrow small amounts so you can eventually borrow large amounts.”
Wise credit card use rules are the same whether your account was developed for college students or not. However, student credit cards tend to have low credit lines and high interest rates, which makes paying far more than the minimum requested payment essential.
For example, if your account has a 15.14 percent APR (the July 2017 average rate for student credit cards, according to CreditCards.com’s Weekly Rate Report) a $500 limit that you max out (a 2016 Experian survey found that 58 percent of young adult cardholders about to graduate charge about $530 monthly) and then only pay the minimum, it will take over two years to pay off that debt, and it will cost about $79 in interest charges.
Therefore, says Reiss, “The main thing is to not overspend with the card. Always track your purchases. Make sure to pay in full at the end of the month. With mobile banking, it’s so easy to track your transactions. But also sign up for alerts to let you know when your payment is about the be due. Paying on time is very important so you can stay current with your account.”
Adopt a financially prudent attitude while you’re still in college, as it will likely remain with you for life. “Never use credit cards as supplemental income,” says Pratt. “If you can’t repay what you borrow in a month or two, stop. Don’t make the charge. You should always have enough money to pay the total bill.”
Other student card management tips from Pratt:
- Read statements at least once a month. You’ll notice spending patterns that you can use to develop a realistic budget and spot problems that need addressing quickly.
- Conduct all credit business online. Ask the issuer to not send paper statements. Most students live in groups, and the more people who have access to your private paperwork, the greater chance fraud will occur.
- Don’t use your card to buy things for your friends. It’s hard to force people to pay you back, and if they don’t, you’ll be stuck with the bill.
- Know your limits. If you try to charge something that adds up to more than your credit line allows, you’ll likely be rejected, which is embarrassing. Worse, if the transaction goes through, you could be hit with a over-limit fee of $25 to $35 and an APR hike.
Lesson 4: Understand how credit reports and credit scores work
With few exceptions, credit card issuers send a person’s account activity to the three major credit reporting agencies, TransUnion, Experian and Equifax. Credit scores are developed from the data on those reports. FICO and VantageScores are the most common, and they range from 300 to 850, with higher numbers predictive of lower lending risk. Because the information on your credit reports will constantly change with your activity, so will your credit scores.
The credit card will appear on your credit report before it’s even granted, though. Applications show up as a hard inquiry, and too many of these inquiries (especially when there’s little else on your reports) will hurt your scores. Therefore, only pursue an account you’re likely to be approved for.
For credit scoring purposes, you’d be wise to keep your student card for at least a few years. Closing credit cards is especially damaging to the credit scores of young people, since it removes from their credit reports a substantial portion of their credit history. It is better to keep it open and occasionally buy something with it to keep it as an active account.
Payment history and credit utilization (the amount you charge relative to your credit line) are the most important factors in a credit score, so always pay the bill in full and by the due date. Because a credit score can be calculated on a debt you’ve not yet deleted, Pratt suggests going a step further. As soon as you make a charge, pay it off. This way you’ll guarantee a perfect payment pattern and the scores will be based on a low or zero balance.
Monitor your credit reports by pulling them from annualcreditreport.com, which is the official site for the three credit reporting agencies. You can access them for free once a year.
Watch the progression of your credit scores, too. You can order FICOs for a fee at myFICO.com, though an increasing number of credit cards give away free credit scores. VantageScores are also available on CreditCards.com at no cost.
Lesson 5. Next steps
By properly handling one student credit card, you can build impressive credit scores in as little as a year. When your scores are at least 700, consider adding a regular unsecured card to your portfolio. If you have a steady income, you should be eligible for a new card with no annual fee and a valuable rewards program. Managing multiple accounts responsibly will help your credit rating soar.
Greater borrowing power also can help you on the job. “For example, with some jobs travel is involved and you may have to book flights with your own card and the company reimburses you,” says Pratt. You’ll want to keep your options open, so he recommends being able to charge least $2,500. That might not be hard to achieve even with your original student credit card.
And if you do falter with your student credit card by overborrowing or missing a payment due date, don’t worry, says Pratt. “Your life isn’t over; it’s just getting started.”
The remedy is simple. Stop charging and pay as much as possible to the account until your debt is paid off. Send all future payments on time. Time and plenty of positive payment action heals all credit wounds.
* The content on this page is accurate as of the posting date. Please see the bank’s website for the most current version of the offer.
See related: Charged Up! podcast: Credit 101, Repairing credit damage incurred as a young adult