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10 ways students can build good credit

“I always advise parents when the student is going off to college, unless you’re 100 percent sure they’re responsible, the first credit card that student should have is yours,” says Mike Sullivan, director of education for Take Charge America, a Phoenix-based nonprofit financial education and consumer debt service organization.

The teen should be an authorized user on the parent’s account so the adult can monitor the child’s spending. Additionally, this can help the student build good credit via “piggybacking,” a controversial practice that FICO — creator of the widely used credit score that bears its name — continues to permit among family members. In piggybacking, a parent makes a child an authorized user. If the parent has good credit, the child’s credit gets a boost.

While becoming an authorized user has long been a popular choice for students aiming to build good credit, for some it may now be the only choice. In the wake of the Credit CARD Act, people under the age of 21 now must have a co-signer or show proof of independent income if they want to get approved for a card in their own name. In short, that means that if you can’t prove to the issuer that you have the means to pay your balances, you probably won’t get a card.

If you can provide proof of income, it may be time to apply for a card in your name. But know that things have changed from the days when every college freshman’s dorm mailbox overflowed with credit card offers and card issuers rained free pizza and T-shirts on students who applied. In this post-Credit CARD Act era, most issuers are no longer clamoring to put a credit card in the hands of every college student. Some no longer offer student cards; others switched to pushing debit cards on campus. Also know that when you receive a credit card that’s all yours — one with no co-signers — the responsibility for handling the card wisely and repaying your debts falls squarely on your shoulders.
Once a student is able to qualify for a regular card on his or her own, it’s important to remember that not all credit cards are the same, says Clarky Davis, the “Debit Diva” for CareOne Credit Counseling, a debt relief service provider based in Columbia, Md. Before a student applies for a credit card, “he or she must do some research to find a card with the most benefits — a lower interest rate, no annual fees, reasonable credit limits and clear billing policies.” If you think you might carry a balance, go with a no-frills, low interest credit card. A reward credit card may sound cooler, but the higher annual percentage rate (APR) and possible annual fee won’t be worth it.

Sullivan says some students should consider starting out with a retail card. Retail cards come with fewer benefits and lower spending limits, Davis says, but using this card and paying the bill regularly will build good credit. Davis says those who can’t qualify for a retail card will need a secured credit card, which is attached to a savings account. However, if the student pays the bill responsibly and on time, he or she will eventually qualify for a regular credit card. That includes student credit cards, products that are directly aimed at consumers who may lack significant borrowing history.

Since responsible card use and on-time repayments will help you build a good credit history, while also discouraging the bank from closing your account due to inactivity, don’t just leave that plastic sitting in your wallet. “Getting a credit card means you start a credit history and shows on your credit report that you have one account and no late payments,” Sullivan says. “But if you really want to start credit, you have to use the card.”

One way to do that? Consider putting small, recurring charges on your card: Think of regular expenses, such as groceries or website subscriptions (such as Netflix), that you won’t have trouble repaying at the end of the month.

A credit card is a valuable financial tool. However, students must be able to manage their credit card responsibly to benefit from using the tool,” Davis says. Keeping your debt levels low will ensure that if there is an emergency expense, you’ll still have plenty of your credit line accessible. That way, if your tire blows out or your cell phone falls in the toilet, you can purchase a replacement without exceeding your credit limit.
When you are first building good credit, do your best not to carry a balance on the card. Use the card only for purchases you can afford, and pay off the balance at the end of each month. What if you can’t? You are living beyond your means and shouldn’t be making those purchases. “A student should only have a credit card if he or she has a job or some sort of income to support this financial tool,” Davis says. If you carry a balance, you will owe interest fees. Why pay a fee if you don’t have to?
Think only your credit card affects your credit? That’s how it used to be, says Sullivan, but “right now, there are a lot of folks, including credit bureaus, who are developing alternative credit scores for no-file people, which includes lots of young people. They’re giving some credibility to utility payments.” One of the three major U.S. credit bureaus, Experian, collects and lists rental payments on its credit reports. However, it’s still a relatively new phenomenon, and most landlords don’t yet report to the bureaus.

Sullivan says other dues, such as taxes and library fees, can make a difference, too. He has seen students whose credit has been ruined because they failed to pay a traffic fine. Davis agrees: “Paying all your bills — from apartment rent to your Internet service — consistently and on time is essential.”

Just like you may need an adult co-signer to get approved for a card, your under-21 friends will, too. To help them get approved for a card, some of these friends may approach you to become a joint account holder. “I have found that some students are getting older students (fraternity brothers, etc.) to co-sign. That is quite dangerous,” Sullivan says in an email. Consumer experts have a tip for you: Don’t. That’s because when a friend slips up — by taking on too much debt or missing payments to the bank — the co-signer can quickly see their own credit ruined. “You not only become liable for everything charged if your friend decides not to pay, but it could blemish your own credit record,” says Edgar Dworsky, founder of the website

Making your friend an authorized user also poses risks. Once again, their mistakes can hurt your credit, although — unlike when you co-sign on a card — an authrorized user can be easily removed from the account.

Now that you have credit in your own name, don’t go wild. If you apply for too much credit in too short a period of time, your credit score will fall. If you have built up strong credit over several years, it will hurt you less, “but if you have barely established credit and apply for multiple cards, it can lower your credit score significantly,” Sullivan says. One credit card should be enough for most college students, he says. How many cards should you have? “To prevent excessive credit card debt, it’s better for consumers to have as few credit cards as possible. Having just one card is ideal for most students,” Davis says.

Students should view their student loan as a great way to cultivate important habits that will help them build and maintain good credit,” Davis says. If you use them correctly, that is. Sullivan says he sees a lot of young people take out student loans to buy cars and other noneducation items. “Manage your loans by only borrowing what you need to go to school — that keeps the balance down,” Sullivan says. “When you get out of school, be prepared to consolidate when appropriate.”

Davis and Sullivan agree that the real key to keeping your loans healthy is to make at least the minimum payment every month and do it on time. Davis recommends paying more than the minimum to pay the loan off faster, and emphasizes that payments should be received by the creditor on or before the due date on the statement to keep the account in good standing.

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4 Reasons Why College Kids Need a Credit Card

“Landlords, prospective employers and even cell phone providers may pull your credit report as part of a background check, but there won’t be anything to see if someone has never managed a line of credit.

“Graduating with enough credit to compute a score will help in the young adult’s favor,” says Cunningham. “Every graduate wants to get rid of that old clunker and upgrade from their dorm room experience into an apartment at some point. Those adult actions are going to require a credit history.” Responsible students should be working toward an end game — moving out, buying their own car — and all of that is going to take a positive credit file.

Entrepreneurial-minded young adults who might one day seek a small business loan will also need to have an established credit history. But just having a credit card isn’t enough — you have to use it and make payments on time in order to have evidence of responsible borrowing and repayment reflected on your credit report, says Hopper. “Start out small, by perhaps charging gas on the credit card, and then paying off the balance in full at the end of the month,” he suggests.

Going over monthly statements can be a powerful way for parents to help their students monitor spending, says Cunningham. “You may start by holding their hands, but then move to looking over their shoulders, until finally they are responsible for their own credit actions,” she says.

What you want to avoid is becoming an enabler by paying off bills if they rack up too much debt. Instead, you can minimize the amount of debt your teen can accumulate by starting off with a small credit line, say around $300-$500. “There’s nothing wrong with asking the issuer to cut down the credit limit,” says Hopper.

Having a line of credit available can offer a layer of financial security should the student run into an emergency situation while far from home, says Cunningham. Whether it’s a car breakdown, an unexpected medical visit or even having to spend more on books than was budgeted, parents can rest easy knowing their teen has credit at their disposal.

Of course, it’s on the individual to know what constitutes a real emergency, warns Ornella Grosz, author of “Moneylicious: A Financial Clue for Generation Y.” “It’s easy to swipe the card and use the emergency excuse, but an all-inclusive trip with your friends, for instance, doesn’t count,” she says. In other words, talk to your child and go over some examples of when using credit in a pinch is OK so there are no misunderstandings or excuses.

If your college student is going to get a card, he or she should take advantage of cash back or other rewards programs, suggests Grosz. Note that these programs are best for those who pay off their balances in full each month.

Hopper suggests focusing on simple products when shopping around for a credit card. Start with those that have good rates and no fees, and if possible, then look into cards that offer cash rewards as an added bonus. Earning airline miles and other travel rewards might sound ideal for students who fly home a couple of times per year, he says, but it usually takes a significant amount of credit spending to earn enough points for a flight, and airline cards typically carry hefty annual fees.

By leveraging credit appropriately, says Grosz, college students can begin building a clean credit report and practicing smart financial habits that will help them achieve their future financial goals.

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