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 Dear
Dr. Don,
I am a college student with no credit history. I want to get a credit card for multiple uses but mainly books and gas. I plan on paying the credit card with my checking account.
I also have a certificate of deposit account. I have been researching the secured credit card but I don't understand how it works. Can you explain this to me? Should I be looking at a gas card or maybe a student credit card with a spending limit?
-- Ashley Apropos
 Dear
Ashley,
When I was a college student, the conventional
wisdom for building a credit history was to get
a "gas card" and a Sears card. Once
you established a payment history, you'd be able
to graduate to a MasterCard or Visa. There are
two tiers of gas cards today: cards that typically
limit credit purchases to the service station
or cash advances at an ATM, and branded cards
that are also Visas or MasterCards. Citibank is
now the provider for the Sears card.
A secured credit card usually gives you a line of credit equal
to an amount you have on deposit with the card
provider. A $500 deposit gives you a $500
line of credit. A few secured cards will
give you a credit line higher than the deposit
amount, but it's pretty rare. The key in
using a secured card to build a credit history
is to make sure they report your payment history
to the credit bureaus. It's the payment
history that builds your credit history.
If you qualify for a national credit
card marketed to students, then that is a better
approach than the secured credit card because
it skips the intermediate step of building a credit
history with the secured card. One advantage
of the secured card, however, is in tying your
credit line to the deposit. You can't get
in as much trouble with a secured credit card
if you discover you are irresponsible in using
credit.
A gas card will help you build a payment history. So will a secured card or credit card obtained through a student promotion. You need to consider interest rates, grace periods, annual fees and credit lines in deciding which card is right for you.
Don't apply for multiple credit
cards. Each application creates a credit
inquiry on your credit report. The inquiry
stays on your credit report for two years, though
it's only used in calculating your credit score
in the first year. Multiple applications
make you look desperate for credit and lenders
hate to lend to desperate people.
Since you're a student, let me assign some homework. Read through Bankrate's Credit Card Basics to learn about the different types of credit and how you can build a credit history that will allow you more financing flexibility in the future.
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