I’m a big advocate for college students having at least one credit card. Which is funny, because I got myself into a decent amount of trouble and credit card debt in college. But I do strongly believe that responsible credit card use in college is possible… and even necessary! But new government legislation is going to make getting a credit card and building a credit history very difficult for some college students. If you’re one of them, you’ll want to get a credit card now, before the new laws take effect!
You Need to Build a Credit History
I just graduated from college this year. I’m starting to build my life and get all of the “adult” things that go along with that. Including some really dull things like “renters insurance” to protect my belongings in my new apartment. But when I got my renters insurance a few weeks ago, it came with a letter stating:
Thank you for trusting us as your insurance company. We are committed to your satisfaction and providing you with a competitive rate. Many factors are taken into account to rate insurance, including a credit based insurance score. We recently accessed data from the consumer reporting agency… to price your policy. In part, based on the information provided, you did not receive our lowest rate… [emphasis added]
In plain English: my credit history wasn’t long enough, and my credit score not high enough, to get the lowest rate they offer on renters insurance. And I’m no “credit spring chicken!” I’ve had student loans on my report for five years, and I have two credit cards, each with more than two years of history. Someone with no credit history at all would probably pay far more than I do for renters insurance.
Why? Because no credit history is viewed as just as bad as a bad credit history! Unproven customers are scary to insurance agents and loan officers. Just like a 16-year-old with no driving record is charged a lot for car insurance, a new borrower with no credit history is going to be charged a lot for a loan.
Need more examples? How about my friend who just bought a car, but didn’t get a low car loan rate because he’s only had one credit card for one year? Or how about the fact that in addition to loan officers and insurance companies, your credit history and score might be checked by landlords and employers. Yes, they two can decide whether to rent to you or hire you based on your credit history. Ouch.
You Need to Act Now
The CARD Act, passed by Congress and signed by President Obama in May of this year, will severely limit your ability to get a credit card if you’re under 21. The Congressional Research Service summarizes the relevant portion of the new law as this:
Section 301 -
Amends TILA to prohibit extensions of credit to consumers under age 21, unless the consumer has submitted a written application that meets specified requirements. Requires any such application to be signed by a cosigner, including the parent, legal guardian, spouse, or any other individual who has attained the age of 21 having a means to repay debts incurred by the consumer in connection with the account.
In other words, you’ll need a parent to co-sign your credit card and take responsibility for it if you fail to pay. While this is a good idea in theory, it leaves out in the cold many college students who don’t have a good relationship with their parents (or anyone else over 21). This amendment is set to take effect in February of 2010, but (and this is a big but), a few members of Congress have requested that the new laws take effect December 1st, 2009!
That’s good news for the many other consumer protections the CARD Act offers, but bad news for any college students who don’t yet have a credit card, and would have trouble convincing someone to co-sign for them. If that’s you, your time is limited – build credit now!
Other ways to build credit: A credit card may not be right for you, or you may be reading this article too late to act before the CARD Act takes effect. Either way, MSN Money’s Liz Pulliam Weston has a great list of ways to build credit without credit cards. Any application for credit should be taken seriously – you don’t want to start doing these things willy-nilly. But a charge card or a small federal student loan may be worth it for the benefit to your credit history.
20 responses to “College Students: Get a Credit Card RIGHT NOW” 
My son just turned 18. Definitely something we need to think about. I don’t believe in co-signing so now maybe a good time to get one.
If the law goes into effect, are Credit Cards where you “pre-pay” the credit limit affected. It seems the pre-paid cards could also be a good way for parents to help them establish cards without putting a lot of money at risk.
Thank you,
cd :O)
Chris: That depends on the card. Most “pre-pay” cards do not build credit history, because they function more like debit cards. Some “pre-pay” type cards, called secured cards, do build credit history (as long as the bank reports the activity to one or more of the credit bureaus). I have no idea how secured cards will be affected by the new legislation – let me see if I can find that out.
But yes, if you want your son to build credit with a credit card, without you co-signing on it, he must apply before the new legislation takes effect!
All I have to say is second. This is great advice. I also belive that one of the greatest gifts a parent can give their kids is a good credit score when they graduate from school.
The problem is that when you play with snakes you get bit. Yes I’m saying credit cards are snakes and they do bit. The fact is that a Jr. Achievement Study “The Case for Economic Education” found two things. One is that more young adults are filing for bankruptcy than are graduating from college and that more and more colleges are reporting that they are losing more students due to credit card debt problems than they are to academic failure.
This is too much risk for very little gain.
Chuck: I’ve covered the question “can college students handle credit?” before on this blog – in fact, it’s linked as one of the “related posts” to this posts. Do some of us get in trouble? Yes, of course – and I say that as someone who got into credit card debt in college myself. But it taught me more than I ever would have learned if I hadn’t gotten into trouble. Even though I had to drop out (more a symptom of my student loans than my credit card), it put me on the path in life I needed to be on.
And I don’t buy for a second that there is little to gain here – I get stories all the time of young people denied loans, housing, good insurance rates, and even jobs because they have no credit history. I think instead of shielding students from credit, we need to be teaching them how to use it. Not saying “you can’t,” but saying “this is how to do it right.” You don’t hand a kid a hammer and let them hit himself in the face with it – you teach him how to use it. A credit card is just like any other tool – it must be used carefully and correctly.
Stephanie,
The problem is that people “use” credit cards to build a “Credit Score” which is not a measure of financial success, it is only a measure of how one uses debt.
Debt is a product, a highly marketed product in our society. If not having a credit score due to being responsible and paying cash is what keeps one from getting a job, then our society is more twisted that any of us are ready to admit.
I have chosen not to play their game. Funny that most millionaires agree with me. While I’m not there yet, if you do what rich people do you will become rich and if you do what poor people do you will stay or become poor.
An old Jewish proverb says “The rich rule over the poor and the borrower is slave to the lender.” Welcome to 21st century slavery aka debt.
For those who are looking for help in breaking free from this slavery you can contact me at chuckmohn.com.
Chuck, that’s all well and good, but I wonder what your advice to a college student would be. Things like “work hard,” “save,” and “be an entrepreneur” are givens that I’ve mentioned elsewhere on this site. But I disagree with your assessment that millionaires reject credit, and I don’t think there are many millionaires that would tell someone just starting out to ignore their credit score.
So what would you say to a college student? Actually, what do you say to college students, since that’s who you’re talking to by commenting here.
I agree, you have to be careful to use the credit card responsibly but instead of being scared of growing up take the opportunity to take responsibility while in school. Remember to pay off the card balance in full each month.
Definitely definitely support this. But for goodness sake do NOT do what I did and use it as an extension of your income.
I’ll say it again.
DO NOT use it as some kind of additional paycheck!
You’ll likely do what I did and spend the next 8 years of your life paying for it. Set it to PAY IN FULL each month.
Please.
Excellent advice! Also, I did not know that there was a chance that this would go into effect potentially as early as December of this year. Great job pointing this out!
Ha ha…. Excellent opportunity to steal students money. Hi guys be aware of this…
I started building my credit with a secured Mastercard from Orchard Bank ( $200 )
It worked.
Income to Debt ratio is very important also, so it must be all balanced.
Advocating the use of credit cards for college kids is a two-sided proposition to be honest. On one side, it is good to expose youth to the credit world and teach them how to manage their own expenses, but on the other side it is also risky because a credit card is a huge responsibility even for an 18-20 year old. I however, think the risk is worth it
First time commenting here so not exactly sure how to do it, but I wanted to respond to Stephanie and say that actually 75% of the people on the Forbes 400 list (400 richest people in America) said the best way to build wealth is to become and stay debt-free.
It does not make any sense at all to me, to encourage college students, most with no or very limited income, to go into debt to eventually save a few dollars on renter’s insurance. How much more money could they have in their pocket if they are not making payments on credit cards and saving and investing that extra money instead? Certainly it would be enough to cover the difference in the renter’s insurance.
I do not think there is such a thing as responsible credit card use. You can get by in the world without them. Studies show that when using a credit card instead of cash you spend on average 18% more and it is the rare person who pays them off each month-and even if you do you are spending money on things you don’t need and that are not in your budget. Live on a budget, use cash, spend less, live below your means and maybe someday you’ll end up on the Forbes 400 list.
Lisa, thank you for your thoughts. I would like to point out that I am not necessarily encouraging college students to go into debt. You can use a credit card without “going into debt,” by paying it off monthly and not carrying a balance. One study indicates that 30% of US households use credit cards in this way. So I still do not believe that millionaires would tell you to avoid credit entirely… but they would probably agree with me that you should not carry a balance.
However, if you don’t use a credit card or charge card (which is like a credit card, except you CAN’T carry a balance) to build your credit score, you might just have to get a real loan and pay actually interest to do it. That’s why I advocate for credit cards – they’re one of the few credit-building resources we can get that you can actually use for free. But again, you have to do it right, and you have to be aware of the fine print.
It is not just about renters insurance – that was one example out of the bigger picture. If was going to pick “one” thing it’s about, I would go with mortgages. Having a solid credit history and a good score can save thousands and thousands of dollars in interest for homeowners who take out mortgages. But you have to start establishing credit early, and you have to do it right. But even mortgages are just a slice of the big picture, because credit scores and histories affect so much in modern American society. Is that fair? No, probably not, but I don’t give advice out for how to live in a fair world – I have to assume my readers live in the real world.
As far as the “when using a credit card instead of cash you spend on average 18% more” statistic goes, again, that is something I have discussed previously on this site: Do We Spend More When We Swipe Plastic? (Actually, it’s the most viewed article of all time on my website.) In it, I touch on a growing trend I have seen: younger people seem to spend more with cash. Whether or not you believe me on that is your decision – it’s purely anecdotal. But I find it’s true for myself. I watch my spending very carefully with either a credit or a debit card, but cash always feels like “fun money” that can be spent on candy and shoes.
I understand that people have strong feelings when it comes to credit cards and debt. And truthfully, not everyone can handle a credit card – just like not everyone can handle a hammer without hurting themselves. But I give my peers the benefit of the doubt – let them try their hand at responsible credit card use with a low-limit card. If they abuse it, they’ll have to cut it up and learn from the experience, or deal with the consequences. If they handle it well, a bright credit score is in their future. That’s everyone’s individual choice and responsibility.
I agree that its critical to get a credit card while in college. I rented several apartments were credit checks were performed and if you had no credit history you were out of luck. Imagine if you’re 18 now and don’t have a credit card…you could basically graduate college and not have enough credit history to get an apartment after you move to take a job!
It comes down to personal responsibility. If you weren’t able to use a card responsibly, no need to try to scare others in to not getting one. I had several credit cards throughout college, and I paid them in full each month…a practice I continue now.
Plus, if we’re all so worried about the debt that students carry, why don’t we give everyone free tuition so they don’t have to worry about student loans?
I think that teaching a student how to use a credit card responsibly is one of the best things a parent can do. There are certain things that can only be paid for with a credit card (at least easily). College students shouldn’t really need to buy that much anyways. Just buy what you need and what you would be able to pay today (or maybe within a week). I have two jobs while I’m a full time student and end up working between 20 and 30 hours a week in order to pay all my bills in full.
its so easy to get credit cards, a cave man can do it! So why don’t you? Stay on top of your finances by focusing your expenditures and putting them all on one spending tool. instead of cash here, credit there, debit this, check that. Stop fooling yourself! save money and save LOTS of time by depositing your money for a rainy day and using a credit card to consolidate all buying tools
credit cards are so easy to get that it is foolish NOT to have one. it’s easy to get credit cards even if you have bad credit. sure, it may be a secured credit card, but you will still be able to focus all of your finances into 1 spending tool. which means ease of mind.
This Holiday season, don’t try to kid yourself, and just keep everything all in one place, on that simple credit card, heck, even get your picture or your dogs picture on it if that makes you trust it more!
I get my credit card when I graduated on college. And this is the best part of it coz I don’t have a credit history.
Yes, It is very hard to get your first credit card. You must build more credibility to be approved by the provider. I only got my first credit card with the help of my friend,who works in a bank. Now I maintain 4 credit cards.