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.