Intro to Credit Cards: A College Student’s Guide
About this guide
College is a launching pad to adult life. It may be the first time you're living on your own, paying your own bills, taking charge of your own schedule and prepping for the career you want.
In short, what you learn in college shapes your future.
That's precisely why we at Credit Cards House created this guide. While some say credit cards are dangerous, we say they're useful tools that, if used wisely, can set you on the path to excellent credit and financial empowerment.
This guide will explain why college is a great time to begin your credit journey. We'll also equip you with the knowledge you need to avoid common pitfalls and graduate with the many advantages excellent credit offers.
Table of contents
- How credit cards can jump-start your credit score
- How credit cards can damage your credit score
- How to check and track your credit score
- Credit card options for college students
- Are you really ready for a credit card
- Choosing and applying for your first credit card
- Rejected? What to do?
- Using your card responsibly
- Graduation and beyond
Why should college students consider credit cards?
Don't think of credit cards as a means for buying things you can't afford. Instead, think of them as a tool for jump-starting your credit history.
How you use your credit cards feeds into your credit score -- a number that will govern your post-college life. Banks, cellphone companies and even landlords can check this score to see if they want to do business with you.
To understand why credit scores are so important, think about your GPA for a moment -- and all that this number conveys to potential employers and graduate programs. It tells the complete strangers you want something from (a job, acceptance into a competitive graduate school) that you are capable. It tells them you've prioritized your education for four years, balanced your academic responsibilities with other commitments and completed assignments on time.
Your credit score functions the same way. It tells complete strangers (the bank you need a car loan from, the landlord you want to rent from) that you are responsible with your money, have balanced your financial responsibilities and can make payments on time.
How credit cards can jump-start your credit score
Clearly having a good credit score is important. Now here’s how to make sure yours is excellent -- and the role credit cards can play in that.
What is a credit score?
"Credit score" is a generic term to describe something that's quite complex. As you use credit products (credit cards and loans), the banks that provide these things report your behavior to the credit bureaus. There are three major bureaus in the U.S.: Equifax, Experian and TransUnion.
Various entities then take that data from your credit reports and use their own algorithms to calculate a credit score for you, which they then sell to banks and lenders so that they, in turn, can decide whether to lend you money or give you a credit card.
There are several models of credit scores, but the most commonly used by lenders is the FICO score. FICO (formerly known as the Fair Isaac Corporation) is a data-analytics company that utilizes the info on your credit reports to produce a three-digit score that ranges from 300 to 850. The closer you are to 850, the better. Technically, you have three FICO scores: One based on Equifax data, one based on Experian data and one based on TransUnion data.
An increasingly popular competitor is the VantageScore. This score is produced by the credit bureaus themselves (Equifax, Experian and TransUnion). While fewer lenders use the VantageScore, it’s the score most used by websites (such as Credit Karma and Credit Sesame) that provide consumers with free credit scores. VantageScores also range from 300 to 850. The higher, the better. As with FICO, you have three VantageScores: One based on Equifax data, one based on Experian data and one based on TransUnion data.
Why credit cards? What do they have to do with my credit score?
Credit cards aren’t the only way to build your credit score. But they are a great way to get your foot in the door. Yes, your student loans will also feed into your credit score. But, if you're a full-time student, you may not be repaying those yet. Assuming you don’t need a car loan or a mortgage, that leaves credit cards as the most likely first building blocks for your credit score.
To understand how credit cards feed your credit score, let's look at how FICO scores are calculated. FICO looks at five factors, prioritizes them as follows and uses its top-secret algorithm to compute your score.
Payment history (35% of your score): Whether you make payments on time.
How cards factor in: Paying on time every single month helps you maximize this part of your FICO score.
Amounts owed (30% of your score): How much of your available credit you’re eating up. For example, are you using just $20 of your $1,000 credit line, or $999?
How cards factor in: FICO rewards those with discipline. If you stay far under your credit limit (ideally under 30 percent), you’ll maximize this part of your FICO score.
Length of credit history (15% of your score): How long you’ve been using credit products (cards and loans).
How cards factor in: The longer you’ve used credit, the better. If you get a credit card during college, you’ll have a few years of credit history under your belt when you graduate and, therefore, a chance at a higher credit score.
Credit mix (10% of your score): The variety of credit products you have. All loans? All cards? A mix? A mix is ideal.
How cards factor in: Once you start making payments on student loans, you’ll have two types of credit -- credit cards and loans. That gives you an edge in FICO-world.
New credit (10% of your score): How many cards and loans have you applied for recently? If it’s a lot, FICO will see you as a risk and penalize you with a lower score.
How cards factor in: Each time you apply for a card, your credit reports get dinged by an inquiry. Too many dings, and you’ll look credit hungry and risky -- and your FICO score will fall to alert lenders of that.
Confused? Think of your GPA again. Good work and good test scores will cause your professors to report good grades, leading to a high GPA. But not all school work is equal. A grade on a quiz, for example, won’t be weighted as heavily in your grades (and GPA) as a major final project or exam.
Similarly, good credit behavior will lead to good marks on your credit report and high credit scores. But not all credit “work” is equal. Having a long credit history won’t be weighted as heavily as paying on time, all the time. Fretting about the length of your credit history (and other smaller factors) while paying late and running up high balances is like acing the quiz and flunking the exam.
How credit cards can damage your score
As described above, if you get a card early on in college, pay on time, keep your balances low and don’t go crazy applying for a bunch of new accounts, then you’ll leave college with both a degree and a strong credit score.
However, the reverse is also true. Treat your cards irresponsibly (pay late, carry high balances and apply for new credit constantly), and you’ll do credit damage that can take years to undo, because:
- Late payments stay on your credit reports for seven years: If you’re a few days late, don’t panic. Most major issuers won’t report delinquencies until you’re past the 30-day mark. Once you pass that threshold, however, your card provider or lender will report your behavior to the bureaus. Not only will your score plumment, but that late payment will continue to weigh your score down for seven years.
Collection accounts stay on your credit reports for seven years: If you continue to not pay month after month, the bank may sell your debt (they call it “charging off” your debt) to a collection agency. Not only will this agency hound you (collectors are not known for being patient), but the charge-off itself will land on your credit report, where it will sabotage your score for seven years.
Inquiries stay on your credit reports for two years: Every time you apply for a card, that inquiry will remain on your credit reports for two years, lowering your score (although the effect lessens with time). A large number of inquiries has a worse effect on your score. So, if you decide to go on an application spree and apply for five cards, those five inquiries will ride along on your report for two years.
The consequences of irresponsible credit-card use
Having a bad credit score may seem like an abstract threat, but it has some very real-world implications, including:
You may have trouble renting an apartment: Property-management companies and individual landlords alike often pull applicants’ credit scores. If your credit report has evidence of irresponsible credit use, landlords will mitigate their risk by charging you a higher deposit or denying you altogether.
You may be denied certain jobs: Not all employers will check your credit, but some will -- especially if your job requires you to handle money (or have access to valuables). Evidence that you’ve been financially irresponsible -- or are having money troubles -- may make certain employers less likely to trust you.
Loans will be more expensive or impossible to get: If you want to borrow a lot of money (for a home, for example), bad credit will get you rejected -- or you’ll get slapped with a higher interest rate. Getting a 5 percent APR on a $200k 30-year fixed-rate mortgage (versus the 3.9 percent you may qualify for with better credit) means a monthly payment of nearly $200 more -- and more than $40,000 extra in interest paid throughout the life of the loan. While there are plenty of car dealers who are willing to work with bad-credit customers, you’ll get hit with a higher interest rate there as well, meaning you’ll pay more per month and more for the car overall.
You'll get rejected for future credit cards: Maybe you want to finance some furniture or medical bills on a new credit card. Or maybe you'd like a card that earns travel rewards. This will not be possible if you have poor credit. You'll be rejected outright or be approved with a credit limit so low that it's useless for large purchases.
Checking and tracking your credit score
Now that you know what goes into a good credit score (and what destroys your credit), you need to know how to monitor your progress.
You probably log in and check your final grades and GPA at the end of every semester. Keeping tabs on your credit score can be just as easy:
You can pay for them: You can buy all three FICO scores (one from each credit bureau) for about $60 online at myFICO.com. This is probably necessary only if you are applying for a major loan, like a mortgage.
You can get credit scores for free: You're in college and pinching pennies. Luckily, plenty of sites (including Credit Karma and Credit Sesame) will let you see your VantageScores for free. Credit Karma provides free Equifax and TransUnion VantageScores, while Credit Sesame provides a free TransUnion VantageScore. While VantageScores are not as widely used by lenders, they are still a great way to track your progress. These sites will also provide helpful educational information, such as graphs tracking your progress and tips on how to increase your score. They'll also often advertise cards they want you to apply for (that's how they make money while offering scores for free). But, if you can block out the temptation, there's a wealth of credit-building help to be had on these sites.
You can get a credit card that provides a credit score: Some credit cards (including some from American Express, Barclaycard and Discover) provide real-deal FICO scores for free to cardholders. If the card you get has this perk, you can see your FICO score every time you log in. Just keep in mind that, generally, a card will provide a FICO score from just one bureau -- not all three.
Don't forget about checking your credit reports, too.
It's important to check your credit reports. That's where FICO and VantageScore mine their data for calculating your scores. So, if there are any errors on your reports, they’ll contaminate your credit scores.
You can get each of your credit reports (one from Equifax, one from Experian and one from TransUnion) for free once per year at AnnualCreditReport.com. Consider pulling one report every four months (instead of pulling all at once), so that you're covered for the year. One bureau's report may be slightly different from the others, as banks and lenders may not report to all bureaus. Still, for monitoring purposes, checking one report every four months should be enough to alert you to errors and keep a high-level awareness of your credit picture. You may want to pull all three reports at once before applying for a major loan, such as a mortgage, however.
You can also get unlimited access to your TransUnion and Equifax reports for free on Credit Karma.
Credit card options available to college students
You now know that excellent credit is important and credit cards can help you get it. However, there's some red tape involved for college students who want cards.
Your credit card options as a college student
1. Getting your own card: You can apply for a card on your own, if you're 18 or older. However, several years back, a bit of legislation added a stumbling block. The Credit Card Accountability and Disclosure Act of 2009 (commonly called the Credit CARD Act) set some limits on credit for young adults:
If you're under 21, you must have a co-signer (an adult who agrees to share responsibility for the card with you). Or, you must prove that you have enough independent income to pay back your balance. Depending on the bank, "independent income" may include income from a job, scholarship money and money you receive from child support. When you apply for the card, you'll be prompted to input your income, and the bank will verify the number you put in.
2. Get a card with a co-signer: If you don’t have independent income, you can ask a trusted adult (most likely a parent) to apply for a new card jointly with you. This means both parties will be responsible for paying the balance. It also means that any bad behavior with the card will hurt both parties’ credit.
3. Get added as an authorized user: This is probably the easiest route to getting a card for the 21-and-under crowd. A trusted adult (most likely a parent) can add you to one of their existing cards, and you’ll receive your own copy of that card to use. You are not responsible for paying the balance (that responsibility lies with the kind individual who is letting you piggy-back on his or her card). But the credit history associated with that card appears on your credit reports and feeds your credit score. So make sure that card has a good history and is owned by a responsible individual.
Are you really ready for a credit card
Whichever of the above methods you use for your first credit card, you’ll need to make sure you’re ready for the responsibility. Even if you go the authorized-user route and aren’t responsible for making payments, you’ll want to make sure you don’t betray the trust of the person who added you to his or her card.
Read the following checklist carefully and make sure you can commit to all points before you apply for your own card, ask someone to co-sign or ask to be added as an authorized user.
Choosing your first card
You've decided you're ready for the responsibility of a credit card. You meet the CARD Act's income requirement and have decided to apply for a card in your own name. Luckily (and perhaps dauntingly) there are plenty of options. Let's review them.
Student credit cards: These cards are offered by major banks and branded as "student" credit cards.
Underwriting for these cards is customized to students. That means, while you may not get approved for one of the bank's mainstream cards due to your lack of credit history and low income, the bank may approve you (with a low limit, of course), for one of its "student" cards. You get a credit card, and the bank (it hopes) gets your loyalty when you graduate, get a job and come looking for better credit cards or a mortgage down the line.
Not all cards require you to be a currently enrolled student, but some may ask you to enter information about your enrollment in your application. Some student-card providers will even give you rewards for earning good grades. Discover, for example, will give you a $20 cash-back bonus each year you maintain a GPA above 3.0 and submit your GPA via online banking.
Credit union credit cards: Credit unions are nonprofit cooperatives that serve their local communities. In addition to offering bank accounts with lower fees (compared to big banks), credit unions may be more willing to offer you a leg-up with your first credit card, especially if you already have a checking or savings account with them.
Secured card: Consider this a last-ditch option. Perhaps you’ve managed to do some damage to your credit -- you were irresponsible with your first card your freshman year, or you have collection accounts due to falling behind on your phone bill or utility payments. Or perhaps you have medical debt.
A secured credit card lets those in such situations make an advance deposit (usually the amount of the credit line). But it still gives all the credit-score-building benefits that regular cards provide by reporting to the credit bureaus. Secured cards are not to be mistaken for prepaid cards. Prepaid cards (Green Dot and the like) are a form of debit card. While they look and feel like credit cards, prepaid cards do not report to the bureaus and do not feed into your credit score.
College students who simply have a blank slate for a credit history probably don't need to go the secured-card route. Secured cards are a more of a tool for those who don't qualify for regular student cards.
How to choose which card to apply for
Which card you start with is up to you, but here are some things to keep in mind:
Don't get distracted by rewards: As you research student credit cards, you'll see that some offer rewards, usually cash back. But keep your eyes on the prize (a good credit score). If you suspect earning rewards will cause you to spend more, go for a plain-vanilla card that won't tempt you to take it out of your wallet.
Avoid annual fees if you can: Some cards geared at those with limited credit are from what are known as "sub-prime" banks -- banks that do business with people who get rejected by mainstream banks. Cards offered by such banks usually come with monthly or annual fees. If you have some credit damage, you may have to swim in the sub-prime waters. But if you simply have blank-slate credit, you can likely get a card that has no annual fee from a big bank, or your local bank or credit union.
Applying for your first card
Applying for a card is, generally, the easy part. You can hit the "Apply Now”" button online or go through the application process in person at a bank. Follow these guidelines for a smooth application process.
Apply for only one card at a time
Applying for cards is not like applying to college. Don't apply for a bunch of cards in hopes that you can then mull over your options, based on who accepts you. Remember how FICO dings you for every credit application you make? If you apply for a bunch of cards, your credit report will be riddled with score-lowering inquiries. Plus, having a bunch of cards can be more of a curse than a blessing when you're just beginning your credit journey. You have to keep track of all of them, make sure they all get paid on time and avoid the temptation that comes with multiple lines of credit.
Gather necessary personal information before you apply You'll generally need the following to apply for a card:
Your Social Security number: This is what the bank uses to look up your credit reports.
Your income: You'll need to enter this on the application, along with the name of your employer. Do not make up a number. The issuer will verify your income and may even shut down your account after approval or lower your credit limit if you stretch the truth.
Address: Unsure whether to enter your current dorm address or your parents' address? Enter the address where you receive mail (so your bank can send you important information and statements). This will also be the "billing address" you enter when making purchases online. If you use your current address and then move to another dorm or apartment the next year, you'll need to update your address via online banking.
Know the application process
Whether you click an “Apply Now” button online or walk through the process with a teller at the bank, the application process will generally unfold as follows:
1. General personal information: You'll be asked for your name, date of birth, address, etc.
2. Financial information: You'll be asked to enter the name of your current employer (and sometimes last recent employer if you just started a new job), as well as how much you earn.
You'll also be asked for the account balances in your bank accounts and the amount you pay in rent and other bills. The bank wants to be sure you're not overcommitted in other areas of your financial life.
3. Credit check: You'll grant the bank permission to pull your credit reports and check your credit score. You may be asked a few questions that verify your identity.
4. The results: You may see a screen stating you've been "Instantly approved." If so, pat yourself on the back and wait for the card to arrive in the mail. You may also get a “Decision pending” screen. This means the issuer is looking over your application in greater detail. It might ask you to send in additional information verifying your identity and income.
Or, you may be rejected.
Rejected? What to do
Rejection never feels good. And it may feel extra frustrating to be rejected for your first card. After all, how can you build credit if nobody will give you a chance?
Here are your next steps:
1. Find out why you were rejected: When a bank rejects your credit application, that's called an "adverse action." Legally, any bank that (1) uses credit reports to make a decision and (2) rejects the applicant based on that credit information must provide an "adverse action notice." This notice (which you'll usually get by mail, must include:
- The credit bureau the lender used to make its decision.
- Reasons for your denial.
- Instructions for obtaining a free copy of the report the lender checked.
Before applying for another card, review your free credit report. It’s possible an error on the report led to your denial. And, believe it or not, that’s actually good news. It’s relatively easy to dispute credit report errors and have them removed.
Here are the dispute links for the three major bureaus:
2. Move on to other options: Review your options. Maybe you can ask to be added as an authorized user, or ask a parent to co-sign with you. If that's not possible, consider a secured credit card. Or, if you applied for a card from a bank you don't have a relationship with, try the credit union or bank you already have a checking account with.
Using your card responsibly
Congratulations! You have your own credit card. But here's where it gets real: How you use it will determine your all-important, future-altering credit scores. While credit cards can help you attain an excellent credit score, treating your first card irresponsibly could set you back for years.
Use the following guidelines to ensure your financial future is bright. While the following tips are geared at students holding cards in their own names, these best practices should be followed even if you're an authorized user.
Pay in full every month, no exceptions
Remember, your card is a tool for getting great credit -- not for buying things you want but can't afford.
To maximize your credit score (and minimize your interest costs), make this your blueprint while you're in college:
1. Make one or two small purchases you could pay for immediately with cash per month. These should be relatively small, necessary expenses:
2. Wait to receive your credit card statement in the mail or online. You will receive this statement at least 21 days before your payment is due.
3. Look carefully at your statement. You will see two amounts: The balance due and the minimum payment. The former will be the total of your purchases made in the billing period. The minimum payment is just a portion of your balance, the amount you have to pay to remain in good standing with your credit card company. It will therefore be a much smaller number:
It may be tempting to pay just the minimum. It is the smaller number, after all. Plus, because you're technically paying by the due date, you'll still get points in FICO’s system for on-time payments.
However, if you pay only the minimum, you'll get hit with one of the most notorious aspects of credit cards -- interest. The bank will be happy to let you carry the rest of your debt into the next month, but it will charge you for that privilege.
Your credit card has what's called an APR attached to it. APR stands for "annual percentage rate." If your card has a 20 percent APR, that means if you carry a balance for a year, you’ll pay 20 percent of it in interest. Each month, one-twelfth of the APR is applied to your statement balance. This means, if you have a $1,000 balance in a given month, you'll be charged $17 in interest that month on that balance. Credit card companies will also require you to pay down some of the balance each month, too (generally 1 percent of your balance). So, your monthly minimum required payment in this example would be $17 plus $10 ($27).
Now let's look at some scarier math.
Imagine you have a $1,000 balance at 20 percent APR. Let’s compare a few different scenarios:
Scenario #1: Paying just the minimum
Months till you’re debt free: 66
Interest you’ll pay: $650
Scenario #2: Paying a little extra (a flat $50 a month)
Months till you’re debt free: 25
Interest you’ll pay: $227
Scenario #3: Paying in full
Months till you’re debt free: 0
Interest you’ll pay $0
As you can see, coasting and paying just the minimum will cost you $650 on a $1,000 purchase AND keep you in debt for five years. Paying even just a little extra each month gets you out with less than half the interest costs. And paying in full? That costs you nothing.
This is why we suggest buying only what you have cash in the bank to pay for. If that's a tank of gas or a single ramen-and-cereal grocery run per month, that's the only thing that should go on your credit card.
Keep your utilization low
Even if you have $1,000 in the bank to pay for a purchase in full, that doesn’t mean you should charge that much on a card with a $1,000 limit. Remember the “Amounts Owed” portion of your FICO score? This very important component involves something called credit utilization.
Your credit utilization is the percentage of your credit limit you’re using. Using up too much of it makes you seem credit-hungry and therefore lowers your FICO score. Using up very little of it shows you’re disciplined and therefore boosts your FICO score.
To calculate your credit utilization, divide your balance by your credit limit. For example, using $300 of a $1,000 credit limit would give you a 30 percent credit utilization.
So how low, exactly, do you need to keep your utilization? Most industry experts recommend the following guidelines:
Keeping a low utilization may be tougher than you think. As someone who is new to credit, you’ll likely get a low credit limit on your first card, as banks don’t like to give credit newbies much leeway to run up lots of debt. If you get a $1,000 limit and charge $400 in books, you’re at a 40 percent utilization and in the danger zone.
There are two ways to keep your utilization at a healthy level:
- Charge one (or a few) small charges every month: Use your card for just one textbook or tank of gas, and you won’t have to worry about running a high balance.
- Make multiple payments each month: No rule says you have to pay your balance just once a month. If you end up in the danger zone, log in to online banking and pay your balance down to 30 percent or less of your limit. Banks usually report your utilization to the credit bureaus at the time they generate your month’s statement. So, if you make a big purchase and pay it off immediately, you should be in the clear.
Graduation and beyond
If you follow the advice above, you’ll graduate with the makings of excellent credit -- and, likely, a score that will allow you to get a better credit card with more benefits and the very best loan terms.
To keep your good-credit momentum going, do these two things:
1. Consider keeping your college credit card open: Remember how FICO factors in the length of your credit history? That college card now has a few years of history behind it. If you close it, it will eventually fall off your credit reports (after 10 years, if it’s closed in good standing). To avoid losing that history, ask your bank if it will switch your student card to one of its regular credit cards without pulling your credit again. If it won’t, just leave the account open and charge one small expense on it every few months to prevent the bank from closing it for inactivity.
Having multiple cards open at once also helps you maintain a low, healthy credit utilization. If you have a $1,000 limit on your student card and then get another card after graduation with a $3,000 limit, your overall limit is now $4,000. That makes it way easier to stay below 30 percent utilization.
The one exception to this advice is if your card has an annual fee, but no rewards or benefits to justify it. For example, maybe you got a sub-prime card with an annual fee attached. If so, get a better card and then cancel the old one guilt free. Its job is done, and it's served you well. Any credit boost it's giving you isn't worth the cost of keeping that card open year after year.
2. Track your credit scores: Check your credit scores using the resources we listed above. If they're in the upper-700s or above, the credit world is your oyster, and you should be able to qualify for the best loan rates and the very best rewards credit cards.
If your score isn't quite that high yet, continue using your student card, pay by the due date, keep your utilization low and make your student loan payments on time. Your score will rise.
Your score aside, if your income is low and your student loan debt is high, you may still have trouble getting approved for loans and cards until you raise your income and lower your student debt. But don't let that stop you from continuing to polish your credit and use your card wisely. Once you start clearing your debt and earning more, that excellent credit score will be there when you need it.
First published , last updated
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.