Guide to Credit and Credit Cards for Students
If you’re a student or young adult, you’re most likely learning how to manage your money for the first time. Newfound financial experiences can be liberating.
If you want to buy something, you can make purchases with your first credit card. You can also pay for expenses without having to turn to a friend or a family member. Knowing how to build good credit and how credit cards work while balancing your independence will ensure stability in your financial future.
The Importance of Credit
Good credit score can help you access various financial products and services that can make it easier to own a home, buy a car or even get a job. Learning how to build credit is a lifelong skill that can ultimately help secure your financial future.
Credit literacy, or the ability to understand credit, is key to navigating the world of credit cards. Familiarizing yourself with these terms can help you become more credit literate.
- Principal: The total unpaid amount of a credit card loan.
- Credit card limit: The maximum amount you can charge on a credit card.
- Balance: The amount of money which is owed on a credit card and paid off each month.
- Interest: The percentage a credit card company charges to lend you credit.
- Minimum balance: The smallest amount of money you must pay each month on your credit card.
- Co-signer: A person with good credit who applies for a credit card with you and can assume your credit card debt as their own.
Having a good credit score is an important way to build good credit. A credit score is a number that determines whether a person can obtain a credit card. A score within the range of 300-670 is on the lower end of the range and suggests you have bad credit. A credit score ranging from 670-850 implies you have good credit and are more likely to pay off future debts. Even if you have a low score, you still have opportunities to improve or raise your credit score.
A credit report is a statement that gives you information about your credit history and current credit situation. Credit card companies use the report to determine if you are eligible to receive additional credit. You can obtain a free credit report every year.
With more people using cashless forms of payment like credit cards, it’s important to learn about how to keep track of your finances and implement good spending practices.
How to Build Credit as a Student
Whether you’re a new college student or a young adult on your own, making good financial decisions can ensure stability. Here are two ways you can build credit.
1. Get a Secured Credit Card
You can start by building your credit with a secured credit card. A secured credit card is a card funded with money you have already deposited to pay off the card’s balance. For instance, if you deposit $300 on the credit account, your card limit will be $300.
Here are the steps involved with getting a secured credit card.
Apply for your card
Apply for a secured card on the website of any credit card company.
Understand your deposit
Once you’re approved, the company will tell you how much you have to deposit to the card account.
Check your mail
Your card may arrive within a few weeks. Then you can activate it and begin using it.
Start spending within reason
If you stay within the predetermined amount, you will be able to use the card to build credit.
2. Become an Authorized User
Another option is to become an authorized user. An authorized user is an individual besides an account holder who has legal permission to use a credit card. The user is not always responsible for paying off account balances and may have limited management control.
Using Credit Cards Safely
Getting your first credit card is exciting, but there are risks. If you’re not cautious about your credit card use, you run the risk of having a bad credit score. Below are some of the pitfalls to avoid.
Risks of Credit Cards
Making too many charges on your credit card can lead to credit card debt, but there are ways to help you be debt-free. If you reach or exceed your credit card limit at the end of the month, it may be unlikely a credit card company will extend credit to you in the future. If you miss a payment or only make the minimum required payment, you also run the risk of having bad credit. A credit card balance can spiral out of control if not properly managed, leading creditors to close your card or charge you higher interest rates.
Common Mistakes Made by Students
While building credit is important, many young people make careless errors with their credit cards. Here are some of the most common mistakes made when using credit cards for the first time.
Making late payments
Students often make late payments because they’re not paying attention to the credit card payment date. But paying cards late hurts you in the long run because of extra fees. Even if you’re making a small payment, make sure you pay your credit card bill on time. If you can, pay off the entire balance every month.
Only paying the minimum balance
While paying the minimum balance can save you money in the short term, it can end up costing you dearly. Just like with late payments, paying the minimum balance means that you’ll ultimately fork over additional money in fees and interest.
Maxing out your credit card
Reaching your credit card limit can hurt your finances and credit score. Make sure that you keep track of your spending. If you have maxed out your card because of an emergency, you may be eligible for a hardship repayment program.
Having too many credit cards
While having one card can help build credit, having too many cards can be harmful. If you are managing more than three credit cards, it can be harder to keep track of your expenses. Focus on having one or two, and pay off those balances every month.
Benefits of Credit Cards
Credit cards can parlay into future financial success. Many employers and landlords take credit scores as an indication of financial responsibility, so having good credit can make it easier to land a job or rent an apartment. If you have good credit, you may also qualify for lower interest rates on car loans and private student loans.
What You’ll Need to Apply for a Student Credit Card
There are many options for students who want to apply for a credit card, but you will need to fulfill some basic requirements to be eligible. Best practices include completing an application, submitting documentation and checking your credit report.
A Completed Application
Pay attention to fees, interest rates and other charges when looking for the right card. Whether you’re visiting a credit company’s website or your local bank, you must submit an application to be approved for a credit card. The credit card application process can take less than 10 minutes and will usually involve sharing basic information. Once you click submit, creditors will examine your debt-to-income ratio, which is how much money you earn relative to your debt. You should have a decision within 30 seconds of applying.
Some documentation is needed to apply for a credit card tailored to students. You will need to submit a form of ID that shows you’re at least 18 years old and enrolled in college. Often, you must also show your social security number to prove you’re a U.S. citizen or a permanent resident, in addition to providing proof of income. A part-time job can qualify as proof of income, but if you don’t have any income, you can add an employed co-signer to your credit card application.
A Double-Checked Credit Report
Applicants should always check whether they have credit previously established in their name. Even if you haven’t had a credit card, you may find that you are the victim of identity theft. You should also make sure there are no errors in your credit history, which can happen if you have a common name. A credit freeze can prevent additional errors or fraud.
Getting Your First Card Can Be Tricky
Showing an established credit history can be difficult if you’ve never had a credit card. If you are studying on a visa or don’t have documented status in the U.S., you may also need to provide additional paperwork.
Undocumented Students and Students From Abroad
Some issuers only offer credit cards to U.S. citizens or permanent residents, but you don't need to be a U.S. citizen to qualify for a credit card. Be prepared to verify your identity with some form of official documentation. If you are in the U.S. on a student visa, you may be eligible to qualify for a student credit card with a copy of your passport, student visa, immigration forms and an eligible U.S. bank account.
With full-time course loads, most college students have limited time to make money. Student credit cards are specifically designed to give those with a low income a good chance at being approved. Some issuers also have set agreements with institutes of higher education which enable enrolled students to obtain a credit card, so it’s worthwhile to ask your school for guidance.
Options if You Don’t Qualify for a Credit Card
Digital wallet payments and debit cards can help you bypass credit cards altogether. If you don’t qualify for a credit card, there are also steps you can take to build your credit to apply for another card in the future.
It’s likely you already pay for streaming services such as Netflix, Hulu or HBO, or use Verizon to make calls. Experian Boost is a feature offered by credit reporting company Experian which can help you get credit for monthly bills by making qualifying bill payments part of your credit file.
The more easily you can show you are serious about paying bills, the more likely you’ll have a higher credit score — and creditors will issue you a credit card. You can raise your score if you are a dependable tenant. Companies such as RentTrack and PayYourRent can issue reports to credit bureaus upon request, or you can ask your landlord to report rental payments directly.
Expert Insight on Credit Cards for Students
MoneyGeek spoke with credit card experts to provide expertise on how to build credit and understand their options for young adults and students.
- What advice would you give to college students who are getting their first credit card?
- What are the best cards for college students who want to start building their credit?
Chief Lending & Growth Officer at Mission Lane
Consumer Credit Expert and Founder of Army of Writers
Director of Retirement Security at Cornerstone Financial Services
Resources for Students
A variety of resources can help students learn about building credit. The following sites are a good place to start:
- CashCourse: The National Endowment for Financial Education created this website to educate college students about financial literacy. College students can register for a free account to learn about financial issues like building credit.
- Affordable Colleges Online: This resource includes articles about how students can build credit and find affordable higher education options.
- Consumer Finance: The Consumer Financial Protection Bureau helps students, young adults, and their families manage money, build credit, save or pay for college, and repay student debt.
- My Credit Union: My Credit Union is a part of the National Credit Union Administration (NCUA). It offers assistance on how college students can understand their credit card statements and build their credit.
- Take Charge America: Take Charge America is one of the largest nonprofit credit counseling and debt management agencies in the nation. It works to help individuals and families achieve self-reliance, financial stability and independence.
- Center for Financial Independence: Hosted at Northeastern University, CFI helps students learn about financial literacy and building credit through workshops and presentations, student mentor financial counseling and a personal finance incubator.
- MoneySmarts: MoneySmarts aims to help students make informed financial decisions before, during, and after college. It can help you analyze what college will cost, make a budget and give you basic knowledge about borrowing.
- My College Money Plan: Funded by the Financial Literacy Project at Wichita State University, this free online course helps students and their families learn how to plan for life after high school and gain money management skills.
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