How to Build Credit as a Student - dummies

By Steve Bucci

Most young people entering college or technical school have been brought up using their parents’ credit cards. They’d sooner be without their cellphones than do without a credit card. But after they cross that line from authorized son or daughter user to customer, they’re exposed to all the pluses and minuses of the credit industry.

Imagine new drivers getting behind the wheel with no driver’s education, no insurance, no speed limit, and no police to tell them to slow down. Not a pretty picture, is it? This scenario applies to students and credit. Check out how you can avoid crashing your credit and maybe your immediate future with some insights and suggestions for students and their parents.

Check out the CARD Act

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) aimed to bring about more responsible lending and borrowing and foster more accountability in debt management. The CARD Act set rules to reduce heavily indebted students who often have to drop out of school, work full-time jobs while studying to pay off debts, or enter the job market with damaged credit that can interfere with finding a job.

Key provisions include

  • Proof of income: Under the law, if you’re under the age of 21, you must show proof that you can repay any credit card debt you may incur.

  • Cosign requirement: If you don’t have sufficient income, you need to find someone who does to cosign on the account.

  • Credit limit regulations: Card companies can no longer offer a preapproved credit limit just because you’re a student. Limits have to be based on your independent ability to repay, or you need a cosigner. And if you have a cosigner, the cosigner must approve limit increases in writing.

  • Fewer sign-up incentives: Card issuers can’t turn your head with sign-up rewards such as free T-shirts, pizza, or electronics. The law also prohibits credit card companies from hitting you up on school property. They must remain a specified distance away from campuses. However, they can set up shop at other locations favored by students.

  • Practical financial education: Though not a part of the CARD Act, you may find some financial education programs at your school. Many schools require freshmen to attend sessions on credit and debt management.

Practice student credit etiquette

No, you don’t need white gloves or a tie to practice credit etiquette. But if you’re new to having your own credit and being responsible for the consequences, here are some basic rules for keeping your credit neat and tidy, regardless of how messy your roommate is:

  • Don’t apply for a credit card you don’t need. Every time you apply for a card, it counts against your credit score, whether you’re approved or not.

  • It’s okay to leave your socks lying around, but not your credit cards or billing statements. Misuse and identity theft happen to students, too!

  • Lend a shirt, your car, or your date to a friend, but never lend your credit card. You’re fully responsible for anything your friend does with your card. Anything!

  • Decide what you consider to be an emergency worthy of using your credit card before one happens to you. If you can wear it, eat it, or drink it, it isn’t an emergency!

  • Stick to one low-interest-rate card and charge only what you can afford to pay in full each month. If you must use more than one card, pay off the card with the highest interest rate first, and make at least the minimum payment on the other(s), on time.

  • Before you charge an item, reflect on whether you can pay it off at the end of the month. If you know that you would have to carry the balance over, estimate how long you would need to pay it off before swiping. If the answer is more than 90 days, seriously reconsider buying the item!

Student credit loopholes to watch out for

Any law has its loopholes, and the CARD Act is no exception when it comes to protecting students from credit card schemes. The CARD Act doesn’t allow credit card issuers to market their cards on campus, but they may operate just over the edge of campus. Older students have been buying beer for younger students forever, so cosigning for a student under 21 is nothing new.

Students need to show income to get a card, and some applications may allow student loan proceeds to be counted as income. Income verification beyond filling out the application can be spotty for young adults who may not file their own tax returns.