New college students working on building a good credit history may find it’s no easy matter. You must be at least 18 years of age to get a credit card account in your name alone, and those ages 18 to 21 must prove established independent income.
Since the Credit CARD Act of 2009, most college students under 21 need a co-signer before they can get credit at all. This means those just starting out will have to partner with someone with established credit (usually their parents) to guarantee their debts will be paid. This lowers the risk for the creditor, but puts the co-signer at risk if the student they co-sign with doesn’t pay.
This may be the only method for some new college students to obtain credit, but we should point out that we typically advise people not to co-sign for anyone else when it comes to getting credit cards or loans. If your parents are nice enough to do it for you, that’s great, but it’s risky and should only be done with careful consideration.
There are some strategies to help overcome all of these challenges:
Open a Secured Credit Card
Secured credit cards are an almost sure-fire way to be approved. The downside is, you need to have some money up front to establish the account.
To get started, you would talk to a local credit union or your bank about getting a secured card. They collect a deposit, and give you a credit card with the same limit as the funds you have placed on deposit. So if you give them $1,000, they give you a credit card with a $1,000 limit.
Then, you can use the credit card normally, pay it off every month, and establish a credit history. There is very little risk to the lender—they simply keep the deposit if you fail to pay off your credit card balance—so the odds of being granted a credit card this way are very good.
The downsides are the large deposit you have to come up with to get started and the risk to your own credit if you don’t repay your debts responsibly. The idea of a secured card is to prove you can handle using credit cards. If you don’t make your payments, you’re proving just the opposite, and your credit will be devastated.
If you do use the card appropriately and make all of your payments on time, the creditor will eventually convert the secured card to a regular credit card account and return your deposit to you. And by then, you will have built up a credit score that may give you access to more affordable credit options.
Become an Authorized User
In some cases, an established credit holder can add you to their account as an authorized user. Typically, the authorized user will get a card with their name on it, and you have access to use the credit available. You may benefit from the positive credit reporting on the account.
You make payments as you would with any other credit card, but only the primary cardholder is held responsible for payments (if you miss a payment). The downside is, you get hit by any negative reporting on the account, so if the credit holder (or you) misses a payment, being an authorized user is more of a negative than a positive.
Therefore, it’s very important to set expectations together about how much can be spent and who will pay. As an authorized user you aren’t contractually tied to the account, and if the account becomes negative you can ask the credit reporting agencies to remove it from your credit report. Not all credit card accounts include authorized users when reporting to the credit bureaus, so you’ll have to make sure your credit card company will do so before setting up this kind of arrangement.
Work a Side Job
If you have a steady income while in school, you can avoid the co-signer requirement and apply for your own credit card. You just have to thoroughly document a steady income history. And even with a proven source of income, creditors will be reluctant to grant you much credit, and what you do get will be expensive. But as long as you have money coming in, it may be possible to get credit on your own.
Learn How to Manage Credit
All of these methods rely not just on getting credit, but on managing your credit accounts responsibly once you have them.
If you’re an authorized user or have a co-signer, work with the account holder to make sure the bills are being paid on time every month. Use automatic payments to guarantee a consistent, timely payment schedule, and you’ll start building better credit with every monthly payment.
Choose your Credit Accounts Carefully
The kind of account you open will make a difference to your chances of success. A card you can use everywhere is more likely to be used and build up a balance that can’t be easily paid off. It’s better to stick with a card that has some limits.
For one, the lower the credit limit, the better. That way, even in the worst-case scenario, if the card is maxed out, the dollar amount isn’t astronomical. This is a good argument for a secured card, where the total balance could be as low as a few hundred dollars.
Besides the amount, choose a card that can only be used in limited situations if possible. Our favorite recommendation for college students is a gas station credit card. If it can only be used in one place, for one product, then the amount of debt that can accumulate should be reasonable. And if you’re just using the card to fill your gas tank, then you should be able to pay off the balance in full every month. That way you’re building a credit history, but not paying any interest.
Another important factor is that a credit card must be used to establish your credit history; if you throw it in a drawer and never touch it, it won’t help you establish that you can handle a credit card account. A gas card is likely to be used consistently, which will be helpful in building a credit score.
Another option is a small loan for a fixed sum, like a loan for a computer. This is something you probably need for school and can get expensive. Buying it on credit gives you a debt to pay off that will establish your creditworthiness, and if it’s just a computer loan, then you’re not going to be able to use that loan to run up additional debt every time you go shopping.
If all of this seems overwhelming, remember, it’s okay to not have a credit card at all. In our article, Should college students have credit cards?, we argued that it’s a bad idea for college students to use credit cards. However, if you do choose to use credit, only have one credit card.
Some credit unions and banks offer “credit builder loans” designed specifically for new credit users to build a better credit score. Students should get started early with banking and build a relationship with their credit union or bank so they can access these kinds of products.
If you’ve already built up some credit card debt and are not sure how you’re going to pay it off, reach out and talk to a credit coach before things get any worse. Before you know it, holiday shopping time will be here, so take charge of your spending and pay off debt before things get out of your control.