How Students Can Build Credit

By Lisa Phillips on Sep 28th, 2011 in How to Guides, Rebuild Credit Scores

Some time ago in the not too distant past, students could apply for credit, be pursued by credit card companies and granted credit — with no verifiable way to pay for that credit. That was before the Credit Card Act of 2009.

In February 2010, rules governing credit use by young adults under 21 years old went into effect. Students can no longer get a credit card unless they have: (1) A job or source of funds to pay the bill or (2) A co-signor willing to be financially responsible for the credit card bill.

Banks and credit card companies are also prohibited from setting up shop on college campuses to solicit students to apply for credit cards. Gone are the days when you could get a T-shirt or sandwich in exchange for applying for credit cards.

I remember I got a jumbo pack of peanut M&M’s and a 2 liter bottle of orange soda and all I had to do was sign up for a total of — wait for it — 9 credit cards. What a naïve, hungry freshman I was.

In many ways the new rule for students is commendable. It may save many college students from graduating with credit card debt. But students still need a way to learn how to maneuver and manage in a society where credit is unavoidable.

Having too much credit and no income to pay for that credit is definitely a problem for students but having no knowledge of how to manage credit can present its own set of problems. Students need to have access to a financial institution and products in order to learn the valuable life skill of managing credit, saving money and budgeting expenses.

Here are several ways students can build credit:

1. Get a Co-Signor. If your parents or someone else is willing to co-sign, has good credit, the income to handle payments and willing to help you build credit…go for it. The best credit cards for students are ones with rewards. If you are going to dive into the world of credit it may as well be beneficial to you.

The Discover® Student Card has 5% Cashback Bonus® in categories that change like travel, department stores, gas, groceries, restaurants, and up to 1% unlimited Cashback Bonus® on everything else you buy.

2. Authorized user accounts. Get a family member with good credit to add you as an authorized user on their account. This will give you access to their credit line and the account will be reported on your credit files. Their credit history will instantly become part of your credit history so make sure the account is in good standing. Authorized users are not financially responsible for making payments on the account.

3. Secured Credit Cards. With secured credit cards you put up a deposit as collateral to secure the credit card. This way you set your own limit. Secured credit cards are typically much easier to qualify for because you are using collateral to secure the credit line. Be aware that not all secured credit cards are created equally.

Pay attention to the fees associated with any credit card. If the fees are too much, you may want to reconsider. The First Progress Platinum Secured MasterCard® Credit Card requires no credit history or minimum credit score for approval. There is monthly reporting to all 3 major credit bureaus to help build credit. You can choose your limit by depositing from $300 up to $2000 in and FDIC insured account.

4. Campus Credit Union. Most colleges and universities have credit unions or are affiliated with credit unions where some financial products are specifically designed for students. The credit unions are good sources for student loans and most offer unsecured and secured credit cards at great rates.

5. Prepaid Cards. Many banks are rushing to design prepaid cards specifically for students. Prepaid cards can definitely help you manage and store money but most do nothing to build credit, not to mention the prepaid cards do not offer interest on the money loaded on the cards.

Some prepaid cards say they help you build credit but what they may not tell you is the credit you build is at an alternative, rarely used credit bureau, PRBC. The credit score widely used by most lenders, banks and credit card companies is only based off your credit files at the major credit bureaus — Experian, Equifax and TransUnion.

6. Manage Credit Responsibly. Exercise restraint when using credit cards, they are not free money. In order to build credit you must pay your bills on time and never go over the limit of the credit card. In fact, in order to build really good credit, keep your balances low.

Do not charge over 30% of your available credit limit. That means if you have a credit line of $700; do not charge more than $210 of the available credit limit. Maintaining low balances will go a long way in building excellent credit scores.

Students must keep in mind credit cards should be kept active, but with small charges, like textbooks, not the latest version of PlayStation. You must use your credit card on a regular basis in order to build a good credit history; but, the charges should be kept to a minimum, something you can pay off quickly and on-time.

7. Never Pay Late. Late payments are a huge contributor to low credit scores. Payment history accounts for 35% of overall credit scores. Paying late is a credit score killer! If at all possible, pay more than the minimum due when the bills due. The ability to pay more than the minimum lets lenders know you are not only financially capable of paying your obligations but you also manage credit well.