Credit Confidence: Best practices for college student credit card use

Prepping college-bound kids for that freshman-packing flurry? Make sure the to-do list includes a conversation about obtaining a credit card.

At first glance, it might seem counterintuitive to suggest that college students who likely already anticipate student loan debt to take on credit card debt. But there are benefits to having a credit card as a college student:

• Using the card helps to establish credit. Careful card use can help students build a credit history, and post-college needs such as renting an apartment or buying a car will require good credit.
• Card use can reinforce financial best practices. It’s one thing to talk about careful spending, but it’s another to be responsible for reasonable card use and regular card payments.
• Cards can serve as a financial safety net. Credit cards can be tapped in a fiscal pinch, such as realizing the price tag on an essential textbook is more than a student checking account can bear.

The CARD Act, which has some restrictions on credit card accounts banks can offer, especially to people under age 21, limits college student credit card options. One option is for students to acquire the card on their own. Students should be able to demonstrate an independent ability to pay the credit card bill. If a student cannot demonstrate an independent ability to pay, then the student may choose to open the account with a creditworthy co-signer who is age 21 or older who agrees to become liable on the account.

Another option is for the student to become an authorized user of one of his or her parents’ credit cards. Obtaining a secured card is a third option. This card is secured by collateral – a cash deposit that secures the card’s limit. (One caveat applicable to both the authorized user and secured card scenarios– if the main objective is to build credit history, be sure to check which, if any, credit reporting agencies receive data from the issuer.)

Regardless of which option they choose, college students – and any credit card user – should know that credit cards carry certain risks that can have a negative impact on card users’ finances, both now and in the future. Credit card-carrying college students will benefit from Credit Card ABCs:

A is for annual percentage rate, which is the interest charged on card balances. A card with zero percent introductory APR can help finance first-year expenses by giving the card user an interest-free grace period.

B is for credit card balance. It’s important to remember that charges to a credit card are loans from a bank that must be repaid. Some college credit card users will pay off card balances monthly to help build a strong credit history and avoid paying interest charges. Those who don’t – or can’t – make that monthly pay off should look for the lowest ongoing APR. Fair Isaac Corporation, also known as FICO, offers good insight on how credit card balances might affect credit scores.

C is for credit score – Given that building credit history is a primary reason for college students to have credit cards, students should know their credit scores and how their card use might impact credit scores. Two words to remember – Late. Payments. Just one late payment can lower a credit score.

F is for fraud – Common sense and credit card use go hand in hand. The college student card user’s credo is keep the card and card information safe, monitor card use (see mobile banking below) and report lost or stolen cards immediately.

M is for mobile banking. Banking by smartphone makes it easy to track credit card purchase activity, payment due dates, available credit and credit card balances, as well as receiving payment alerts and card fraud alerts.

Jane Ensley manages the Enumclaw branch.