I opened up several credit cards within the first semester of college. Each time, I earned some sort of cool promotional item – a shot glass, a tee-shirt, a Penn State keychain. When the cards arrived in the mail a week later, I didn’t really bother to use them and when I did, I wasn’t aware of the fine print. When bills arrived in the mail, I just paid the minimum balance, thinking that was all well and good.
I had no idea what I’d really gotten myself into.
College can be a popular time to establish credit. According to a survey by credit reporting agency Experian, 58% of soon-to-be college graduates possess a credit card, making average monthly charges of over $500.
Opening a credit card when you’re young can be a helpful way to achieve a strong credit score in the future. The length of your credit history is equal to 15% of your FICO credit score. The earlier you establish credit, the longer your credit history becomes and credit score calculators consider this a plus.
But it can only work to your advantage if you commit to managing credit responsibly and educating yourself on the rules and best practices surrounding credit usage and credit health. This includes credit cards, student loans and other types of credit.
Specifically with credit cards, since 2009, the laws have changed whereby those under the age of 21 cannot open a credit card without a cosigner or proving they can afford to make the payments (i.e. have income). The CARD Act (aka The Credit Card Accountability, Responsibility and Disclosure Act), which implemented this rule, also bans banks and card issuers from marketing credit cards to college students.
Still, there are smart and responsible ways to establish credit when you’re young. Here’s the credit advice and education I would have given my 18-year-old self back in the day.
Student loans can help you established credit.
While a large part of your credit score relies on how well you manage revolving debt, like a credit card, student loans also play an influential role. Student loans and mortgages, which you pay back in equal installments every month, are what are known as installment loans. Be sure to be current and on time with your student loans. While they’re often hailed as “good debt,” a missed payment or delinquency can make life miserable.
Credit cards are not free money.
It’s really, really easy to spend when using a credit card. In fact, it’s a lot less painful than using cash, research has found.
Resist temptation and if you’re prone to impulse purchases, avoid keeping the card in your wallet.
Instead, leave it in a drawer at home and link a couple online bills to the card and charge routine expenses to it like a utility bill or gym membership fee. Only spend what you can pay back in full, reconciling the bill with an automatic transfer from your checking or savings account when the balance is due. This way you’re still “using” the card, but not making it all too convenient to swipe (or dip, as it now is). All the while, you’re establishing great credit.
Bad behavior can haunt you for years to come.
Just like with student loans, one missed payment on a credit card can stain your credit report for years. Later, when you’ve graduated and long forgotten about the incident, a future lender or landlord might take that into account as they review your credit report. They may think twice about lending you money or even offering you the keys to a lease. Steer clear of late payments by automatically scheduling payments to your credit card each month and use a free loan calculator to see how many payments you need to make until your debt is paid off.
Talk to a parent or older friend before opening a card.
As part of your due diligence, before opening a credit card, speak with someone older and more experienced. Speak with a parent or older friend for their advice. How did they establish credit? What credit card do they have and why?
Can’t qualify? Avoid cosigning with parents.
If you’re under the age of 21 and don’t have income to prove you can afford credit card payments, you may be tempted to ask a parent to co-sign the credit card offer with you. But realize that you are putting a parent equally on the hook for payments. If you can’t make a payment, the card issuer goes after the co-signer.
Instead, consider becoming an authorized user on one of your parent’s cards. Their good behavior with the card – paying on time and in full – is something that gets reported on your credit report and boosts your credit health. On the flip side, you may not want to go down this path if mom or dad is not financially responsible. Negative activity on the card also gets reported on your credit report.
As an authorized user you can receive your own copy of the credit card with your name on it. Make a plan with your parent to know how much is OK to spend on the card each month and how to pay back your portion.
Avoid applying for multiple cards.
Each time you apply for credit, the lender or card issuer reviews your credit profile by pulling your credit report. This is considered a “hard inquiry,” and multiple hard inquiries can injure your credit score by several points.
Hard inquiries usually lose their impact after a year, but better to do your research and be very selective, and apply for the one card you have a very strong sense for which you’ll qualify. Mint has a great tool to help you find the right credit card here.
Check your credit report. It’s free!
Did you know that you can review your credit report at no cost each year? And you can do so from each of the three major credit-reporting agencies? Yep, it’s your legal right. Visit annualcreditreport.com to download your credit report from Experian, Equifax and TransUnion.
Periodically it’s important to review your credit report to ensure that your credit usage is being reported accurately. Take a close look all the types of credit listed on the report and the status of each credit card or loan. This is important because information recorded on a credit report directly impacts your credit score (which you can review for free on your mint dashboard.)
Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.