Credit on Campus
Even with a cosigner, generating credit card debt during college is a risky proposition.
The Credit CARD Act of 2009 significantly restricted card use by students and promotional card offers by issuers directly on college campuses. This has greatly reduced the issue of students graduating with unmanageable credit card debt… which is good, considering the increasing challenges they face with student loans.
How does the Credit CARD Act protect students?
There were two main provisions of the CARD Act that aimed to stop rampant credit card debt problems amongst students:
- Anyone under the age of 21 who wants a credit card must have a cosigner.
- Creditors are prohibited to offering “tangible items” to incentivize college students to apply for cards.
If you attended college after 2009, you were saved the experience of signing up for a credit card just so you could get a free cooler or some other swag. That may sound silly, but college breezeways were filled with credit card company reps offering tons of freebies in exchange for signups. The result was students graduating burdened by credit card debt.
The Credit CARD Act also provides some additional protections for young borrowers:
- Credit limit increases for students (and anyone under 21) must be approved by a parent
- Creditors cannot send prescreened credit offers to anyone under 21
- The cosigner for an account must be a parent, legal guardian, spouse or other individual with a proven means to repay the debt; they must also provide written authorization
The Catch 22 created by the CARD Act
As the infographic above shows, the CARD Act certainly helped students from being overburdened by credit card debt by graduation. However, it created a different challenge that students must overcome: how to build credit effectively.
Once you graduate and get out on your own, you need a good credit score. Everything from apartment rentals to signing up for a mobile plan requires a credit check. Having no credit history can hold you back almost as much as having bad credit. So how do you build credit if consumer protection laws keep you from getting it in the first place?
Option 1: Find a cosigner during school
Making a case that you need credit during college is easier than making that case when you’re still in high school. Ask your parents or guardian to help you get a credit card that can be used responsibly. You can even point out some of the protections mentioned above, like they will control the credit limit.
Make sure to discuss how and when the card will be used. Keep in mind that one of your main goals needs to be building a positive credit history. To do this, the card needs to be used monthly. That way you have a bill to pay off in-full (which is the best way to manage your debt). This is why using the card for something like gas expenses that you can pay off with money in your budget can be a good idea. This also applies to recurring payments for things like entertainment streaming accounts.
Option 2: Get a secured credit card at 21
If you aren’t able to get a card earlier with a cosigner, you become eligible for credit when you turn 21. You may start to receive offers for credit cards in the mail. In any case, go online and research secured credit cards. This will likely be the only credit you can qualify to open since you don’t have credit starting out.
The credit limit on a secured credit card is set based on how much you put down as a deposit. For many cards, the limit equals the amount you deposit; a few cards offer added funds in addition to your deposit. Make sure to check APR, annual fees, penalties and terms of card use before you sign up.
Managing debt while you’re in school
Your goal for credit card debt, regardless of your age or occupation, should always be to maintain zero balances. Some people think you need to carry balances on your credit cards to maintain a high credit score. In fact, the opposite is true. You get the most benefit from having high limits but paying off your balances at the end of each month. This will also prevent getting turned down for credit in the future because you already have too much debt.