Getting your first credit card is a rite of passage. Sure, it’s just a piece of plastic, but it’s a powerful one—and you need to know how to wield it responsibly.
Looking for some guidance? You’ve come to the right place!
Welcome to the latest installment of our College Student’s Guide to Living on Your Own, a series showing you how to survive and thrive out from under your parents’ roof. Using a credit card wisely is an important piece of that puzzle.
After all, credit cards prove you are responsible enough to borrow money and pay it back in a timely manner. Having one also factors into creating your credit score—a numerical “grade” on how well you’ve paid off past debts. Landlords will check your score when deciding whether to allow you to rent an apartment in their building; later on this score will become a crucial element to persuade banks to give you a loan to buy a home.
All in all, it’s quite clear how responsible credit card practices are key to your future. Got it? OK, here’s how to start building good credit from the start.
How credit scores are calculated
A perfect credit score is 850. But all scores 760 and above are considered to be in the best credit score range. A good score is from 700 to 759; a fair score is from 650 to 699; and scores below that are considered poor. These are the main variables that determine your score, and to what degree:
- Length of credit history (15%): A longer credit history boosts your score, which is why it’s crucial to start building credit early as a college student.
- Payment history (35%): This is whether you’ve made debt payments on time. Beware: Missed payments can ding your credit score for years.
- Debt-to-credit utilization (30%): This is how much debt you’ve accumulated on your credit card accounts, divided by your credit limit.
- Credit mix (10%): Your credit score ticks up if you have a rich combination of different types of credit accounts (e.g., credit cards, retail store credit cards, and college or car loans). That said…
- New credit (10%): Opening several new credit accounts within a short period of time could signal to lenders that you’re strapped for cash—so don’t rack up tons of credit cards just for the fun of it or the free offers often used to lure you in. Also, each time you open a new credit account, the average length of your credit history decreases, further hurting your credit score, says Bill Hardekopf, a credit expert at LowCards.com.
The best credit card for college students
There are a number of credit cards specifically aimed at credit card newbies. For example, the Journey Student Credit Card from Capital One is a solid choice for college students. You’ll earn 1% cash back on all purchases, plus a 0.25% bonus every month you pay on time.
“If you’re the type of person who always turns things in on time, from assignments to bills, this deal can help you save even more,” says credit card comparison website NerdWallet.
Another good option for first-timers is the Discover it Student Cash Back card, which gives 5% cash back in categories that change each month such as gas stations, grocery stores, or restaurants, and Amazon.com (up to $1,500 in spending per quarter). As a new cardholder, you’ll have your cashback matched at the end of the first year. It’s also a good starter card because late payments will never increase your annual percentage rate, which is typical on other cards.
Don’t qualify for a credit card? What to do
There’s one big caveat to all this: Banks and credit unions aren’t always willing to give credit cards to first-time credit users. And while consumers used to be able to qualify for their own credit card when they turned 18, the Credit Card Accountability Responsibility and Disclosure Act of 2009 requires anyone under 21 to have either a co-signer or independent income that proves they can repay the debt.
Consequently, many college students start with a “secured credit card,” which requires you to make a deposit against the card’s credit limit, and your credit limit will be either a percentage of your deposit or the same as your deposit. Because secured credit cards provide less risk to the credit card issuer, they’re generally easier to qualify for. (Once you’ve established good credit, you can graduate to an unsecured card.) Bankrate.com recommends the Discover it Secured credit card or Capital One’s Secured Mastercard.
Alternatively, you could ask your parents to add you as an authorized user on their credit card. As an authorized user, you’ll get a card with your own name on it and you can start building credit history, but it’s ultimately the cardholder’s responsibility to repay the debt.
Repeat after us: Pay off your balance every month!
Because payment history has the largest impact on your credit score, paying off your credit bill, in full, each month is the best thing you can do to establish good credit, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan.”
Unfortunately, more than half of college students with a credit card (59%) said they carried a balance on their card at least once in the past year, according to a 2018 survey from U.S. News & World Report, with 29% reporting that they carried a balance six or more times in the past year.
To ensure you make payments on time, set up automatic bill payments for your account. This will make it easy and convenient to pay your balance. Plus, it helps you avoid late payments, which can hurt your credit score. (Credit cards also charge fees for late payments.)
Live within your means
Just because a bank offers you a credit card doesn’t mean you should charge up to the full credit limit on the card. Maxing out your card can hurt your debt-to-credit utilization ratio.
Generally, credit experts say you should use up to no more than 30% of your available credit at a given time. So, if you have a total credit limit of $2,000, you will want to be in debt no more than $600. Hence, it’s important to keep an eye on your spending by checking your card’s balance online throughout the month.
Pro tip: Some banks and credit unions will send you email or text reminders letting you know when your credit limit is running out.