“Free credit!” “Come sign up for a credit card and we will give you a free t-shirt!” “Free money!”
Many of you may remember hearing these words as you walked to a football game on your college campus. Or perhaps you remember your college mailbox filled with credit card applications. For those of you too young to remember snail mail, perhaps emailed credit card offers filled your inboxes. Most of these offers of “free money” seemed too good to be true. And they were. Some of us learned the hard way by spending too much and ending up with a load of debt. Some of us were lucky enough to learn from our friends’ mistakes.
Free credit (Aggressive card marketing?) came to a screeching halt for individuals under the age of 21 when Congress passed the CARD Act of 2009. This Act prohibits credit card issuers from offering their products on college campuses or exchanging gifts for completed credit card applications. Many parents applauded these changes. In addition to limiting what the credit card industry could do, the Act also makes it harder for students to qualify by requiring those under the age of 21 to demonstrate the means to repay a debt before they can open a credit card account. This change frustrated many parents trying to help their children build credit. While the changes protected their children from going into debt, they made it exceedingly difficult for them to establish and build their credit scores.
Why is this a big deal? Building credit is very important. Your credit score impacts many aspects of your life. For example, your landlord will pull your credit report to determine if you are a good credit risk—will you pay your rent, and will it be on time? Utility companies commonly check your credit history before providing their services. If your credit history is bad or nonexistent, they may require you to pay a deposit or have a parent co-sign. Employers may pull your credit report to determine if you are at risk for needing money, especially if you will be handling other people’s money. Mortgage and car lenders will use your credit report to determine what interest rate to offer you on a loan. Your credit history, detailed in your credit report and summarized by credit scores, shows how well you’ve handled borrowed money.
The three major credit bureaus, TransUnion, Equifax, and Experian, use a “secret sauce” to calculate your FICO credit score. FICO stands for Fair Isaac Corp., which introduced this scoring system in 1989. VantageScore is a new scoring system developed jointly by the three major credit bureaus in 2006. VantageScores track similarly to FICO scores because both weigh the same factors and use the same data from the credit bureaus. Experts agree that the formula used in determining these scores is approximately the following:
What is a good credit score? Most lending institutions agree that a score of 700 or higher represents a good credit score. Credit scores range from 300-850. According to Credit Karma, the average score for those in the 18–24 age range is 630. Anything above 630 is considered an above-average credit score for a college student.
The keys to building your credit history are using a credit card responsibly, paying your bills on time, utilizing as little of your credit as possible, and paying the balance in full each month. These habits will contribute to a good credit score and could help you graduate to a traditional credit card later.
A debit card from a bank or credit union is not a credit card. Debit cards, while convenient, do not report your transactions to the credit bureaus because no credit or lending of money is involved. Peer-to-peer (P2P) payments such as PayPal and Venmo also do not extend credit and do not impact your credit history unless you link the payment to your credit card.
As a college student, you may have little or no credit history, which, paradoxically, makes it hard to qualify for the financial products that can help you develop a credit file. So what can you do? The best solution is to find a student credit card. A student credit card is designed for and marketed toward students and recent graduates. Student credit cards are helpful first credit cards, particularly for building credit. They generally have lower credit limits than traditional cards, which means their income requirements may be less stringent.
Research the best student credit cards currently available. Each year, many websites, including Bankrate and NerdWallet, research and rank student credit cards. You should know if you qualify before you apply for a card. Make sure you meet the card issuer’s general requirements. Typical requirements are:
If you do not qualify for a student credit card.
Review your credit report regularly. The three major credit bureaus allow you to check your credit for free once a year. We suggest you ask for a report from a different bureau every four months. To get your free report, go to annualcreditreport.com or call 1‑877‑322‑8228. Please note that this is the only legitimate source for the free credit reports. Review your report for inaccuracies. If you find inaccuracies, work with the bureaus to correct the information. Take steps to improve your credit score.
There are a few things to look at as you compare the cards for which you qualify.
Gather the necessary documents and apply for a card. The easiest way is to apply online. However, if you are concerned about your ability to qualify, you may want to call and speak with a representative prior to applying. When applying, you will need:
If you are denied a credit card, a likely reason is that you don’t have sufficient credit history. You can confirm this by asking the issuer for an adverse action letter, which explains why the company declined to extend you credit. Remember, there is a “hard credit inquiry” each time you apply for a card. Multiple hard credit inquiries over a brief period of time will negatively impact your credit score.
If you cannot qualify for a student or traditional credit card, you may want to consider a secured credit card. These cards are designed to help individuals with little to no credit. Secured credit cards require a cash deposit that becomes your credit limit. Minimum deposit requirements tend to be $200 to $300, but some can be as high as $500. Pulling together the deposit on a student income can be a challenge, so you may have to save up or ask someone to help out. You get your deposit back when you close your account in good standing or upgrade to a “regular” credit card with the same issuer.
Lay a sound foundation for good credit habits early and enjoy some rewards from having good credit. Remember the keys to building credit and creating good spending habits.
We cannot emphasize enough the importance of paying your balance in full each month. If you pay in full by the payment due date, there is zero interest charge. If you pay late or less than the full amount, you will be charged interest on your outstanding balance. Interest is calculated daily. If you are unable to pay the full amount by the statement date, try to pay it as soon as possible to avoid daily interest charges. You do not have to wait until the next payment date to make a payment. Interest will continue to accrue on unpaid balances—including interest already charged—until the amount is paid in full.
Used foolishly, a credit card can spell financial disaster. Many people spend decades digging out of the hole of debt they began to accumulate in their college years. Used wisely, however, a credit card can help create a solid track record of financial responsibility. It can be a tool to track and manage spending. It can give you an advantage when it’s time to borrow money for a vehicle or house. Do your research, know the risks, and you, too, can turn a credit card into a tool that works for you instead of a weapon of your own financial destruction.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.