“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. There are also some pretty good cash back rewards cards that can allow you to maximize your money. 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.
Mr. ToughMoneyLove says
I can’t believe this credit card cheerleading is starting already. Just wait until one of your kids starts lighting up the mall with his/her card. Then you will ask; “What was I thinking?” I’ve seen it happen so many times with people I know I’ve lost count. Telling a student to “use a card responsibly” has the same impact on a college student as “don’t text in class”, “obey the speed limit” and “don’t drink beer until you are 21.”
Ryan says
Mr. ToughMoneyLove, I don’t recommend credit cards for every 18 year old – only those who can use credit cards responsibly. And I have known many people who qualified under those conditions, myself included. I got my first credit card at age 18. I knew that if I used it responsibly I would be able to build a strong credit history. I only made charges that I knew I could pay off in full. I used the card regularly and I always monitored how much I charged. Responsible money management and credit card usage helped me have a strong credit score at a young age, which has been a benefit ever since.
Craig says
If students can use them responsibly then they definitely should get them. If they can pay them off in full for 4 years, it will be a great way to establish credit which will help them out of college when trying to rent an apartment and raise their limit.
Ryan says
Good point, Craig. Credit scores are taking on added importance in our society, mostly due to the current credit crisis. The decision to get a credit card today will have a large impact on one’s financial future years from now.
Again, I only advocate getting a credit card if one can use it responsibly.
Enrique S says
This is a timely post. My son starts college next week. I’ve been on the fence about him carrying a credit card, but your post has persuaded me to let him get one. Thanks for the nudge.
Ryan says
Enrique, you know your son best, so if you think he can handle it responsibly, then it might just be a good idea.
Mr. ToughMoneyLove says
Ryan – You assume that you can accurately predict which young adults are mature enough to use a card responsibly. Can’t be done. Particularly if you send a child off to college on borrowed money (student loans), there is a high probability that debt-driven consumption is already implanted in their mindset. There is a substantial risk that the student will damage their credit history by misusing the card. Craig’s comment and reference to laying a foundation for “raising their limit” when they get out of college is exactly the wrong way to look at the issue.
Ryan says
Mr. ToughMoneyLove, I understand your point, and I agree that many young people should not get credit cards… which is why I wrote the caveat in the article.
The point is that the window for opening a line of credit for many young people is closing. The ultimate decision is up to each individual, and individuals between ages 18 and 20 have that choice now – until it is removed in February, 2010. This may be the last opportunity for some people to begin building credit history for several years, and for those who understand the importance of using credit cards wisely and are confident they can do so, this may be a good idea. I was able to open a credit card at age 18 and use it properly. And I believe it was the correct decision for me and enabled me to get a car loan at a reasonable rate when my friends could only qualify for loans in the 20% range. The decision save me money in the long run.
Mr. ToughMoneyLove says
Also, let’s not forget the numerous studies that show that people who use plastic spend more on individual purchases, and collectively on all purchases, compared to cash buyers. But again, that’s part of the unfortunate culture that parents are now projecting on to their kids. For example, Ryan was proud that his credit card experiences enabled him to score a lower rate on a post-grad car loan. My kids (without credit cards) paid cash for their cars.
Ryan says
Actually, I had enough cash to purchase a car but I took the loan because I was moving from Europe to the US and needed to establish a household worth of furniture, bedding, and other household supplies. I had enough cash to cover those items as well, but I chose to purchase the car with a loan so I could maintain a large amount of cash for any unexpected expenses. I paid off the car loan within a year. And yes, I was proud to get a loan at 4% vs 20%.
Credit is a tool, and that is how I chose, and choose, to use it. I continue to use rewards credit cards for almost all purchases because it is easier than writing checks or going to the ATM. Tracking expenses and purchases is also very easy through Quicken because you can download and automatically categorize transactions. I pay my bills in full each month.
Using credit is a personal decision and a wise choice for some. Others should avoid credit at all costs.
Annie G says
My 20 year old does very well with his credit card. His strategy is to pay off the full balance online each weekend when he updates his budget. It also helps because he doesn’t have to keep track of due dates when his life gets busy.
What surprises me is how many 0% CC offers show up at our house for him. His credit score must be good, considering that these offers have been harder to get recently!
John Hunter says
I think students should get a credit card. Some students will fail to act responsibly and that is a problem. The costs for those errors can go on for a long time. But so can other errors college students make.
Ryan says
Just one of many life long decisions young folks need to make. The ramifications can be good if responsible, bad if not. Hmmm, just like college!
Lin Li67 says
Hi there,
Thanks for your helpful post! I currently don’t have a credit card, however I did run into some problems even with my ATM card, and it was HORRIBLE! That said, I’ve FINALLY gotten to the point where I know I need to take responsibility for my finances and learn how to better plan for a financially healthy life. The last thing I want is to be in my golden years and having to deal with the backlash of my irresponsible finances from when I was younger!
A friend referred me to this Wells Fargo Backstage site: backstage.wellsfargo.com/ and my search for a reputable online financial resource ended there. It has lots of info on money management and credit education, which is huge for me. The site is also really pleasant looking and easy to navigate. Would love to spread the word and hopefully help some of you reading this out. I’m still learning about credit and other facets of personal finance, but this site has been a life-saver so far!
Thanks
LIn
Ryan says
Glad to see you learning more about your finances. The site you reference is good if you are only interested in Wells Fargo products, but it doesn’t offer information on financial products not offered by Wells Fargo. It’s more like one big advertisement. It’s important to reference several different websites, books, and other information sources when learning about financial products.
DDFD at DivorcedDadFrugalDad says
The key to this post is– responsibly! Many college students are just spreading their proverbial wings for the first time and trouble can strike . . .
robthejammerguy says
hi i just applied for a credit card with capital one, and got accepted. i am 19 have no credit history and have got one of these cards based on the fact i want to build my credit score/rating. however i have a few questions. what happens if i dont use it much. i.e. once every 3 months? do i have to have to pay a billl every month even if i had bought nothing with the card? will i get charged even if im not using it? i prefer to pay with debit card becuase then i know what money i have remaining and that once its spent its spent.. i dont want to borrow all the time only when money is a bit low near end of month or approaching my payday (say a week before payday and i buy something and pay it off a week later for example) also if i use for a while and decide that i no longer want one will i get charged? or lose my credit history. i.e. i use it for 2 years and then decide i no longer want one and want to close the account can i do this with no problems or complications or charges even??
Ryan says
Rob, great questions. Getting a credit card can help you build your credit so long as you treat it responsibly – otherwise you are only going to hurt your credit score. To answer your questions:
Good luck!