Building Credit in College
Visit almost any college campus in America, and you can quickly tell when it’s time for Back to School. No, it’s not the “Welcome, Freshmen!” signs that tip you off. It’s all the credit card booths offering anything from free food to free T-shirts in exchange for completed credit card applications that tell you the semester will soon begin.
Credit issuers market their student credit cards heavily on college campuses for good reason. College students tend to hang on to their first few credit cards for several years, and are usually very loyal customers. Furthermore, if students get into financial trouble, their parents are likely to bail them out. Most credit issuers generally require that you have a steady source income and an established credit history before they’ll fork over a card. Not so with student credit cards. Card issuers understand students’ unique economic situation and create special cards tailored to them. This usually translates into lower credit limits and higher interest rates than traditional cards.
Many parents advise their students not to apply for credit until after they have graduated from college and are employed. Unfortunately, credit card issuers expect that if you have a job, you should have a credit history. It is usually much more difficult to get a credit card right after graduation than when you entered college. This leads to a vicious circle: in order to get a credit card you need credit history, and in order to build credit history, you need a credit card. Qualifying for a credit card is not the only difficulty when you have no credit history; banks are unlikely to give you favorable rates on auto loans when you buy a car or mortgages when you buy a house. Landlords may be hesitant to rent to you if you have no credit. Your car insurance rates may be lower if you have a good credit history than if you have none. Opening a student credit card account during college lets you avoid the hassles of trying to build credit after graduation.
Clearly the best situation is to build credit early and responsibly, while still in college. Unfortunately, many college students build credit early but not responsibly. College consumer debt is a growing problem in today’s society. A CBS News report in 2003 indicates that “Students double their credit card debt and tripe the number of cards in their wallets between the time they arrive on campus and graduation . . . By the time college students reach their senior year, 31 percent carry a balance of $3,000 to $7,000.”
If you are a college student, what should you do to build credit and avoid debt? Here are some pointers:
- Apply for only one or two cards at the most. You don’t need lots of credit cards to build credit; one is sufficient. If you have too many cards, this will hurt your credit rating.
- Choose your credit cards carefully. Avoid secured credit cards, any card that has a grace period under 20 days, and any card that charges an annual fee. Many student credit cards offer rewards like cash back, free gas, or airline miles. CitiBank offers a number of student rewards cards.
- Charge responsibly. Remember that your credit card is a tool for building credit, not for buying things you can’t afford. Do not charge any more than you can afford to pay off in full at the end of the month. In fact, do not let your credit card change your spending habits at all. Credit issuers will periodically raise your credit limit to entice you to spend more than you can afford. If a higher limit is too much of a temptation for you, call them and ask them to lower your limit.
- Always pay your balance in full and on time. Just as you should charge responsibly, you should pay your balance responsibly. There is no reason to carry a balance on your card if you can pay it off. The interest rates on student cards are usually very high. Contrary to popular belief, carrying a balance does not increase your credit score. (Your credit score is based on your credit report, which does not indicate whether you carry a balance.) If you start to go into debt, follow the steps in our Guide to Get Out of Debt.
