Credits cards for college students. On the surface, this seems like a dangerous proposition. With graduates already shouldering enormous student loan debts, aren’t credit cards just a compounding peril? Well, not necessarily. In fact, it’s a pretty good idea to get a credit card and use it wisely in college. Research suggests that — contrary to old stereotypes — most college students are actually using credit cards to make smart purchasing decisions, to prepare for unseen financial challenges, and perhaps most importantly, to begin building healthy credit right away. The best credit cards for college students will carry minimal fees and penalties, low interest rates, and reasonable spending limits. But what else should you know before getting that cool college credit card complete with school colors and logo? Read on to find out…
A great many students defy the aging myth of the cash-strapped college kid eking by on credits cards that will eventually end up in the hands of aggressive collection agencies (cue early-2000s file-photo of me digging for couch-quarters back in my undergrad years, possibly wearing cargo shorts and a Dave Matthews Band t-shirt). In the place of this credit-challenged college cliche are students who are increasingly aware of the risks carried by bad credit, and proactive about the opportunity to build good credit.
This is a fact which is no doubt impacted by the growing population of non-traditional students — working adults pursuing a college degree, whether on-campus or through online courses. As the total population of college students comes increasingly to include individuals with real financial responsibilities — including work, family, and home life — the demand on this population to make measured and responsible financial decisions has grown.
Of course, it’s not all roses and perfect Equifax ratings. You must still learn to manage your credit card(s) responsibly, to know the risks, and to know how you can make the most of your credit-building years.
If you’re interested in balancing the cost of college by earning an online degree, check out The Very Best Online Colleges.
Or, read on for the 9 Things College Students Need To Know about Credit Cards:
1. Understand Your Credit Rating
Your credit rating is a numerical representation of the potential risk you may pose to prospective debtors or lenders. This score tells individuals, businesses and government agencies what your likelihood is of defaulting on your loans. This number is measured on a scale of 300 to 850. The higher your score, the better your credit, and the more likely you are to receive loans, or qualify for credit cards with favorable terms like low interest rates, minimal fees and penalties, and higher spending limits. The lower your score, the likelier you are to be rejected for credit cards and loans, or to be saddled with higher interest rates, credit cards with lower spending ceilings, and loans with more onerous repayment terms. Bad credit could stand in the way of your ability to lease a car, buy a house, or receive a small business loan. Your prospective employers may even choose to pull your credit report as part of your background screening. So yeah, there’s kind of a lot riding on your credit.
2. Know What Can Hurt Your Credit Rating
You should also be aware of all the different things that can impact your credit rating. For instance:
- Making late payments
- Making only the minimum monthly payment (or less)
- Missing several payments, especially those that are sent to collection agencies
- Carrying high balances on multiple cards
- Maxing out multiple credit cards
- Canceling credit cards
- Applying for and carrying too many credit cards
- Entering debt management, debt consolidation programs, and loan refinance programs
- Foreclosures, Bankruptcies, Short Sales, and other Estate programs
Hopefully you’re not dealing with stuff like bankruptcies just out of college, but we thought you should know. These are all factors that you need to consider as you apply for credit cards, take on debt, and manage payment plans.
For more on making sound financial decisions, especially if you’re carrying a significant student loan burden, check out Student Loan Refinancing — And Other Tips On Post-Graduate Adulting.
3. Start Building Credit Now
There are a lot of factors that can damage your credit rating. Perhaps you’re thinking you’ll just steer clear of that whole hornet’s nest until your on more stable financial footing. But that’s a bit of a Catch-22. The reality is that you need to begin building your credit, and creating a credit history. Lenders want to see evidence that you have capably managed credit debt before renting you apartments, leasing you cars, or lending you a mortgage. If you aspire to financial independence in your adulthood — which is kind of the point of going to college — it’s a good idea to start building your credit in college. A 2016 study from Sallie Mae reports that 56% of college students had their own credit card. Of those, 60% saw it as a way to build their credit. In spite of the old cliches about college and financial irresponsibility, there is evidence that students are doing a pretty good job of building credit. According to CNBC, “About 60% of students say they pay off their credit cards in full every month and fewer than 1% say they pay less than the minimum.”
4. Achieve Financial Independence
Online college has created new opportunities for non-traditional students and adult learners — college students who are 24 or older. If you fall into this category, but are still considered a dependent of your parents, your access to financial aid will be based on your family’s financial profile. By contrast, if you qualify as an independent, your FAFSA information will be based entirely on your financial profile. As a younger earner with a shorter credit history, you may qualify for certain need-based financial aid packages that might not be available under the terms of your parents’ more robust financial outlook. But in order to receive this need-based aid, you must take certain steps to qualify as financially independent. Certain individuals may automatically qualify as independent, including orphans, veterans and active duty service members, graduate or professional students, married individuals, those with legal dependents, as well as emancipated minors and homeless youths.
Whether you do or don’t fall into one of these categories, building your own personal credit history is an important part of achieving financial independence. According to FastWeb, one way to effectively declare independent status on your FAFSA is to “Be a student for whom a financial aid administrator makes a documented determination of independence by reason of other unusual circumstances.” Building meaningful credit and using this credit to procure an independent living situation could help you make your case to an administrator. If you do so effectively, and are able to secure a need-based loan, it may be a sum that you won’t have to repay upon graduation. You don’t have to be a financial expert to know that’s a good thing.
For help navigating the financial aid process, check out Financial Aid for Online College: Everything You Need to Know and Do.
5. Beware of Predators
Back in the day, like the early 2000s, college campuses were a Wild West for the credit card racket. Students were aggressively targeted by predatory lenders. Colorful booths littered college malls, offering free t-shirts and lightweight frisbees with bank logos on them in exchange for a hassle-free credit application. Newly independent college kids who hadn’t been schooled on the risks of unfettered credit spending quickly spiraled into debt. And then the Great Recession struck, and a flurry of new legislation forced credit lenders to take greater accountability. According to U.S. News & World Report, “Before the Credit CARD Act of 2009, credit card companies were a fixture on college campuses, marketing heavily to students in hopes they would become immediate — and potentially lifelong‐customers.” While the new legislation has reduced the presence of predatory practices on campus, it has not ended them in their entirety. And quite naturally, the internet has opened a whole other mess of predatory practices targeting young spenders. So whether you’re on campus or online, don’t be dazzled by free giveaways and friendly pitch-people. Only apply for what you need.
6. You’d Better Shop Around
As for what you need, be sure you shop wisely, and seek favorable terms. According to The Balance, “When you’re ready for a credit card, don’t sign up for the first one that comes your way. Instead, comparison shop the way you would for a new car. Look at a few different credit cards and pick out the one that’s the best deal.” At the very least, advises The Balance, your credit card should carry no annual fee. You’ll also want to read the fine print to learn about penalties for late, missed, minimum, or delinquent payments. It goes without saying that you want to avoid all of these things, but stuff happens, especially when you’re just learning how to manage your money. Obviously, fewer and cheaper penalities are better. And most importantly, you’re looking for the lowest possible APR (Annual Percentage Rate). This is your interest rate. Your balance accrues further debt at that rate for every day that you carry said balance forward. In 2019, average variable credit card ratings reached an all-time high of 17.76%. If you’re shopping for a credit card, anything lower than that is a good start. Again, the lower your APR, the less you’ll pay on top of your balance over time. Don’t sign up for a credit card at a booth. Collect a few applications, take them home and compare them to one another, and to online offers.
7. Students Card or Secured Card?
Among the many personal “firsts” you might be experiencing as you venture off to college, perhaps this is your very first credit card. If so, you should be aware of a few credit cards types designed specifically for first-time users, particularly incoming frosh. Student Cards and Secured Cards, for instance, may offer credit access to young spenders who haven’t yet built sufficient credit for a traditional unsecured card. But what are student cards? What are secured cards? And which one makes sense for you?
Student cards are generally similar to traditional unsecured cards, but will likely carry lower spending limits. According to a study by Student Monitor, in 2017, the average spending limit on student cards was $1322. According to CreditCards.com, it is recommended that you do not exceed more than 30% of your spending limit in a single billing cycle. This is to say that, with its lower spending limit, the student card demands discipline. While this can be challenging for a new credit spending, it can also be a very educational way to build your credit. It’s also noteworthy that some student cards offer rewards to student users. For instance, the Deserve Edu Mastercard for students has no annual fee, provides 1% cash back, and comes with a free year of Amazon Prime Student. The Discover it Student chrome will actually pay you $20 for every year you keep your GPA above 3.0. If you’re not sure where to start with a student card, consider speaking to an account manager at your bank. It’s likely that your bank offers its own student card.
The secured card is an alternative for those with little or no credit. This may be an accessible option if you are unable to gain approval for a favorable unsecured card. In this case, as the user, you personally “secure” the card by making a deposit. In many instances, the amount of this deposit will be your spending limit, or it will at least dictate your spending limit. This can be an effective way to begin building credit. However, experts offer one very important tip. Seek out a secured card that can readily be transitioned into an unsecured card. As we noted earlier, closing a credit card account can negatively impact your credit secure. A good secured card will allow you to transition to an unsecured card as you build your credit through good spending and repayment habits. Some secured cards may offer a clear roadmap to this transition whereas others may require you to request this transition directly through customer service. Find out how, or even if, this transition is handled before applying for an unsecured card. Once you make this transition, you’ll get your security deposit back, and you’ll be given a new spending limit based on your growing credit history. Since the goal is to build your credit, be sure that your secured card is designed as a stepping stone to an unsecured card.
8. Helpful Apps for Managing Your Credit
Stay on top of your spending, your due dates, and your credit rating with a helpful mobile app. Your needs may vary but there are a handful of great apps for your smartphone or tablet that can help you navigate credit spending, repayment, and score monitoring. This is a great idea if you’re new to the world of plastic, particularly because it gives you the opportunity to view your credit rating in real time. You’ll see exactly how factors like responsible spending and balance repayment can improve your credit outlook. And while we hope it won’t come up, you can also see how things like missed payments and maxed out cards can diminish your credit rating. The best apps also come with educational tools including tips for how to build credit, advice on ensuring safe and secure use of your credit information, and helpful alerts reminding you of payment due dates. The great news is that most of these apps are free. In many cases, you can upgrade to premium paid services, but we’re guessing that the free version will be more than enough for you. The Balance points to a handful of helpful financial apps that are compatible with your iPhone, Android, or smartphone, including Credit Karma’s free score monitoring app. Find an app that you’re comfortable using and keep all of your essential debt and credit information right at your fingertips.
9. Do the Math and Make Your Payments
When all is said and done, the most important rule for getting your start as a credit user is only spending what you can pay back on time. You don’t have to pay your full balance every month, though if you can afford it, doing so can help you build strong credit. It’s more important to keep your balance or balances under control, that you never miss a monthly payment, and that you do your best to pay more than the minimum amount due each month. As a bonus, the more you pay off of your balance each month, the less you’ll accrue in interest. And of course, missing payments is a huge no-no. According to NerdWallet, “Failing to pay your credit card bills on time could seriously damage your credit score, and moving into your adult life with less-than-stellar credit is going to make it difficult to get a home or car loan. This is why it’s important to mark your calendar with your credit card bill’s due date and be sure to pay it on time and in full every month.”
Of course, financial hardship, unpredictable expenses, and other challenges can offset even the best laid plans. If you run into challenges, don’t panic and don’t let things spiral out of control. Before late fees and collection notices pile up, reach out to your lender. Demonstrating that you intend to make payments in good faith and working with your lender to make manageable arrangements can go a long way toward heading off greater damage to your credit.
You can also improve your credit over time and you can even repair your mistakes by sustaining sound, responsible credit spending practices. Some say it takes up to seven years to fully repair poor credit. But don’t be discouraged when you run into setbacks. Stay the course and make sound decisions.
And if you’re really struggling to make ends meet while attending school on-campus, consider checking out the Best Online Colleges. If you need help navigating the transfer process, check out Transferring From Campus To Online College.