Despite debt dangers, college kids need credit cards
Memo to college students and their parents:
credit cards aren't all bad.
With all the stories written about students and the perils of credit
card debt, it's easy to forget the upside of signing up for a credit
card as a college student, namely establishing credit.
Good grades, but no credit?
Making the leap from college to the real world is going to
be a whole lot tougher without a credit history.
You could get turned down for an apartment when a potential landlord
checks your credit history and finds nothing there. Or you could
be asked to shell out an enormous deposit before moving in.
Something as simple as turning on the lights in your new place
could cost you as well. Since you don't have a credit card, many
utility companies will require $100 deposit before powering up your
apartment. And you won't get your 100 bucks back for a year.
Without a credit history, you're a great unknown. Your lack of
a payment record makes you a great big blank and a risk.
"If they have no basis for making a decision they have to
assume you're high risk," says Maxine Sweet, vice president
of public affairs at Experian, a credit-reporting bureau.
Anytime someone checks your credit, you'll end up paying a little
Insurance companies check, so you'll pay even more for car insurance.
Looking to buy your first car on your own? Brace yourself for a
high interest rate.
Even getting a credit card will be a lot more difficult.
All those credit card offers you tossed away as a student will
be much harder to come by in the real world. Let's say a pre-approved
credit card offer does comes your way.
There's a good chance you'll be turned down. The reason? The lack
of a revolving credit account on your credit report.
"Ironically, they find themselves once they graduate unable
to qualify for a credit card," says Dara Duguay, author of
Send Money! A Financial Survival Guide for Young Adults on Their
You may even have trouble getting a credit card from your bank.
They'll take your deposits and give you checks, but they won't give
you a credit card.
Experience is everything
You've run right into credit's big Catch 22.
You can't build up a credit history without a credit card, and
it's really tough to get a credit card without a credit history.
In college you didn't have to worry about this because quite frankly
card issuers weren't worried about you not paying. They knew your
parents would likely step in if you ran up oversized balances or
fell behind on payments.
But once you graduate, you and your lack of credit history are
on your own.
"Welcome to the real world," says Steve Rhode, president
of Myvesta.org, a financial crisis and treatment center.
You'll probably qualify for a department store card but that's
not saying very much. These cards come with high interest rates
and low credit limits and they're just not the greatest way to build
up your credit.
"The credit world knows as long as you can fog a mirror you
can get a department store card, so it's not really evidence of
any credit worthiness," Rhode says. "Getting a store card
or a gas card is not a major accomplishment."
Plus, some issuers of department store cards do not report to
the credit bureaus. This means any on-time payments you make with
the card won't be noted on your credit report. Having an unreported
card account won't boost your credit one bit.
"If they don't report, it doesn't do you any good," Rhode
The only all-purpose credit card deals you're likely to qualify
for are reserved for people with no credit or damaged credit. Interest
rates and fees are sky-high, and credit lines are low. Paying hundreds
of dollars in fees for a credit line below $100 is not unusual.
Building a credit profile
You'd be better off applying for a secured credit card instead.
With secured cards, a cardholder makes a savings deposit in exchange
for a credit line.
The interest rates and fees on secured cards tend to be lower than
those charged on unsecured credit cards targeted toward people with
poor or no credit.
Even so, secured cards are hardly credit bargains. Interest rates
in the high teens or higher are typical, and so are annual fees.
Because annual fees may vary dramatically from offer to offer, it's
best to shop around. Bankrate.com lists secured
credit card offers from banks around the country.
Be sure to check that a secured card issuer reports to the three
major credit bureaus before applying for any card. Some of the smaller
issuers may not, which is why it's a good idea to get a secured
card from a major, reputable bank.
Avoid secured cards with processing or application fees. For more
tips on landing a good secured credit card offer, check out Bankrate's
questions to ask before getting a secured credit card."
Remember, you're using a secured card to build up a strong payment
history, not to go into debt. So stick to smaller purchases that
you can pay off each month.
Taking off the credit training wheels
After a year of on-time payments with a secured card, you may
qualify for an unsecured credit card with a lower interest rate.
You've worked way too hard to establish a good payment record.
Don't sell yourself short by signing on for the first costly offer
that comes your way. Be a smart shopper.
card search engine from Bankrate.com will help you compare offers
from issuers around the country.
Don't overlook offers from local banks and credit unions; the deal
you're looking for may be from a lender just around the corner.
As for credit card-free undergraduates? Do yourself a favor and
apply for a credit card before you graduate. It could save you a
whole bunch of hassle later on.
Graduating with a couple of years of on-time credit card payments
would be even better. These money management tips from Bankrate.com
will show you how
to build up your credit without draining your wallet.
And you won't need a lot of cards to build credit. One or two low-limit
cards is more than enough.
"All they're looking for is, do you pay
in a timely manner," Duguay says. "Pay on time every single