Alamy Giving a college freshman a credit card might seem like a recipe for disaster — your kid is probably going to be saddled with heavy student loan debt by graduation day, and the last thing anyone needs is a bunch of high-interest credit card debt on top of that. But if you think your offspring can be responsible with plastic, it’s a great way to start building a credit history early so they have a solid credit score by the time they head into the workforce.
Here are some things to keep in mind when shopping for a card for your college student.
The Law That Makes Them Safer Also Makes It More Difficult
Getting a card for an 18-year-old with no credit history has gotten a lot tougher since some of us were in the dorms.
“In today’s environment, it’s much more difficult to get a credit card than it was in past, and we can thank the CARD Act for that,” explains John Ulzheimer, credit expert for CreditSesame.com. “[It says you] can’t get a card if you’re under 21 if you don’t have verifiable income.”
The law was intended to protect young Americans from getting in over their heads with credit card debt, but a side effect of that is that it’s more difficult for a full-time student to start building a credit history.
But it’s not impossible. One solution is to open a card with your child as a joint account holder, using your credit history and income to qualify. Your child still gets to start building a credit history, and this approach also allows you to monitor their usage.
If you’re going to go this route, though, it might make more sense just to make your child an authorized user on one of your existing credit cards. That will build their credit history a lot more quickly.
“[The authorized user] immediately gets the benefit of the age of credit history,” says Ulzheimer. “If you’re added on a credit card account opened in 1970, the scoring system sees that as a 43-year-old account.”
As a result, it will be easier for your son or daughter to get their own card once they turn 21 and have an income. Even when that happens, though, it might be a good idea to keep the child on as an authorized user but take away the card itself. This approach preserves the positive credit-score effect while cutting the financial cord.
So What Kind of Card Should You Get?
One popular option for building credit is a secured card, which works a bit like a prepaid debit card. You put up a given amount of cash as collateral — let’s say, $700 — and that serves as your spending limit. Such cards tend to be available to people with bad credit or no credit, since the issuer doesn’t assume any risk.
“The options for that are more limited,” says Anisha Sekar, VP of credit and debit products for NerdWallet. “The best you can do is to get [a card] that has no fee.”
She says that secured cards issued by credit unions are most likely to be fee-free. One that she recommends is the Visa Platinum Secured card from the Digital Federal Credit Union. It has no fee, and you borrow against the money in your DCU savings account. If you don’t qualify for membership at the credit union by virtue of a family or employer connection, you can join by becoming a dues-paying member of one of the credit union’s nonprofit partners. The cost of membership should still be lower than what you’d pay in annual credit card fees at many banks.
Ulzheimer does warn, however, that getting a secured card through a credit union may not fully accomplish your goal of building credit.
“It’s not uncommon that the issuer reports to one, but not necessarily all three, credit reporting agencies,” he says. “Generally the larger the bank, the more likely they are to have relationships with all three reporting agencies.” Before signing up for a secured card, do your homework and find out which agencies the issuer reports its data to.
But if you’re co-signing with a parent anyway, you may as well skip the secured card and get a credit card that offers you some rewards. Sekar says that one she’d recommend is the Citi Forward Card for College Students, which encourages responsible usage by reducing your APR 0.25 percent for every quarter that the cardholder stay under the credit limit and pays the bills on time. Over the course of two years, you can get your interest rate trimmed by 2 percentage points.
What’s more, the card provides extra rewards on things that college students love: Cardholders get 5 ThankYou points for every dollar they spend on entertainment, which includes restaurants, movies and bookstores (yes, even your campus bookstore).
The final thing to consider is whether you should get your student a card with a low credit limit or a high one. The temptation for many parents will be to err on the side of caution and find a low-limit card so that their child doesn’t rack up more debt than they can handle. But Ulzheimer suggests going the opposite route and getting a higher-limit card, so that the student doesn’t hurt their score by bumping up against the maximum. (As we’ve noted previously, 30 percent of your credit score is based on the amount of debt you carry vs. amount of available credit you have — aka, your credit utilization ratio.)
“The value of a low limit is you’re restricting their ability to use and abuse card and get into debt,” he says. “But they could leverage the card to the point that it becomes more damaging than beneficial.”