Going to college is the first time many Americans have their first experiences with adult-style responsibilities such as managing their money. The college experience presents unique financial challenges because students must cover all their expenses with little or no income. They often turn to credit cards to pay for the things they need, but it can take many years to come out from under credit card debt amassed in college. Given this reality, it might seem counterintuitive for college students to have and use at least one credit card. Make no mistake about it -- a college student having a credit card is risky, but there are valid reasons why it’s important to leave college with a track record of good credit card management.
Businesses of all types use credit scores in ever-increasing ways to give access or take it away. It’s not easy getting a leg up after graduation, so having high credit scores at this critical milestone is key for access to basics such as getting some types of jobs, being approved for an apartment in a decent area, and buying a car. Things like getting a top-quality smartphone with a low-priced plan and reasonable insurance rates also depend on credit scores, so it’s important for students to establish good credit before they head out into the real world. This is most accomplished effectively by judicious use of a student credit card.
Getting a leg up in life comes at a cost, though, so proceed with caution. Student credit cards have low limits, so parents who co-sign should understand that the cards shouldn’t be used to supplement allowance. The low limit means the user can’t charge that much to the card without maxing it out, which defeats the purpose of having it to build credit. To get the most out of a student credit card, use no more than $10% of the limit and pay off the balance monthly. So, for a student credit card with a $500 limit, charge no more than $50 each month.
Parents worried about their college-aged kids signing up for plastic should know that the law requires credit card applicants under age 21 to prove financial independence or have a co-signer. Most college kids aren’t financially independent, so with their parents’ approval, they should apply for at least one credit card. They just need to be smart about how they use the card to avoid getting into debt.
College students have no credit history, so know that interest rates typically are very high. You can shop around to compare interest rates, but they won’t be as competitive the interest rates charged to consumers with established credit. Also, since these types of credit cards have few, if any, perks, avoid signing up for one that insists on charging an annual fee. Because the purpose of a student credit card is to build credit, there’s no reason to sign up based on rewards -- you won’t be spending enough on the card to redeem rewards of any significance. If you’re planning on studying abroad, you might look for a student credit card that doesn’t charge foreign transaction fees.
Using a student credit card is a simple and clever strategy to build credit and have a top-tier credit score for later on. For the strategy to work, though, you’ll need to another source of income, such as allowance from your parents or a part-time job, so that you don’t have to fall back on the credit card to cover your expenses. Be disciplined about how you use your card and reap the benefits down the road.
