“Student” and “credit cards” are words many people don’t like to hear mentioned in the same sentence. It is easy to point out how many students have racked up thousands of dollars in credit card debt and make a blanket statement that students should stay as far away from credit cards as possible. But I disagree.
Proper credit card use is a great way to increase your credit score. Credit cards are also one of the easiest ways for most people to begin their credit history. It is easier to obtain a credit card with little to no credit history than it is to open a different line of credit without any credit history. Just try getting a car loan or a mortgage without any credit history. It’s not happening.
Why students should open a credit card now
Building credit history is the main reason students should consider opening a student credit card. Unfortunately, the window for many students to open a credit card is closing. The Credit CARD Act of 2009 will go into effect in February 2010 and it will bring major changes to the credit card industry, including enacting age limits on who can open a credit card account.
Under 21 will need co-signer or proof of income. Currently, anyone over the age of 18 is eligible to open a credit card. However, once the Credit CARD Act kicks in, people under the age of 21 will no longer be able to get a credit card in their name unless they are able to prove they can prepay the debt or they have a parent willing to co-sign on their application. This puts many responsible individuals at a big disadvantage because of their age.
Check out a debate on the Credit CARD Act of 2009 for more opinions on the topic.
Credit options for students under the Credit CARD Act
Students and others who don’t meet the age requirements to open a line of credit will have a few options from which to choose.
- Qualify for credit based on income. I have yet to see the requirements for this, so this may be determined by lenders.
- Open a secured credit card or prepaid credit card.
- Open a line of credit with a co-signer.
- Wait until age 21.
There may be students who don’t qualify for credit cards based on income even though they have the ability to responsibly pay their bill each month. Examples would be students who have money in the bank from previous jobs or gifts, or who receive an allowance. This could make it more difficult for some students to establish credit.
Secured credit cards are an option to help establish credit history, but prepaid credit cards have no affect on your credit score. Here is more information about using credit cards to establish or improve credit.
Students should use credit cards responsibly
I don’t think every student should get a credit card. But if they can use credit cards responsibly, then I think they should consider opening a credit card account before this new legislation kicks in. Otherwise they could face a difficult time establishing credit – and many college graduates discover they need a good credit history to rent their first apartment, buy a car, get a cell phone, or other important tasks. Here are some tips to help college students manage credit cards.
Everyone needs a strong credit score – including students
Your credit score is a financial asset. No, it doesn’t produce income, but it can directly affect the interest rates lenders are willing to give you on a loan. The higher your credit score, the lower your perceived risk and the lower your interest rates will be on loans. The lower your credit score, the higher the interest rates. Your credit history can also be used as a screening tool for insurance rates, employment, renting property, signing up for a cell phone plan, security clearances, and more. Many utility companies also require deposits from people with poor credit scores.
A strong credit score will continue to be an important part of most people’s financial planning. Building a strong credit score early in your adult life can make things much easier in the long run. If you take the approach of using credit cards responsibly and to build credit history, then opening a credit card at a young age can be an advantage, not a problem.