Should College Students Have a Credit Card?

Parents have enough to worry about when sending their kids off to college: Will they go to class? Will they eat healthy? Will they party too much? But within the last decade a new worry has emerged: Will they rack up too much credit card debt?

Student loan debt recently surpassed total credit card debt in the U.S. and according to Consumer Reports, the 2011 graduating class of college seniors had the highest average debt to date. In the face of rising tuition rates, more college students are turning to credit cards to cover expenses.

But college kids need to be smart about their credit histories and the debt they are able to take on (and pay off). Erik Larson, president and founder of consumer information resource NextAdvisor.com, equates a students credit score with their GPA.

If you have really poor grades your freshman year, its going to be a real uphill battle to have a good GPA by your senior year, he says. Your credit score is kind of the same way; you start off making [a mistake] and having a low credit score, and any negative information stays on your report for seven years.

The decisions that student credit users make in their early years can impact their financial lives down the road. For many students, credit cards are a part of life, but they should be used responsibly. Heres what the experts had to say about using plastic during college.

The CARD Act

The CARD act enacted in 2009 was intended to protect younger people from being taken advantage of by credit card companies. Now, any one under the age of 21 cannot apply for credit cards unless they have a proven source of money (like a part-time job) or a co-signer on the account (presumably a parent).

Although the law has the interests of young consumers in mind, it also makes it more difficult for young people to establish a line of credit.

Theyre at a disadvantage, both in learning how to manage [credit] and understanding the importance of it and also having it established, says Larson. The nice thing if youre able to get a credit card when youre 18 is that you start to build a credit history. If its positive, thats going to help you when youre 21 or 22 and youre going to get another credit card or maybe you get a better rate.

How to Pick the Right Card 

When picking out a credit card, experts suggests students look at the annual percentage rate (APR), or the amount they will pay in interest charges per year. Many credit card companies offer 0% or a low APR for the first six to nine months, after which the rate increases. Its important students are aware of and take into account how much their rate will rise.

For a student credit card, APRs are really high just because theres no credit history there, says Larson. That can have the multiplier effect when that high APR increases their balance and theyre not paying because they dont have much income, so thats something they have to watch out for.

The experts advise students also check to see if the card has an annual fee and any other penalty fees. Many credit card companies add on more fees if a payment is more than 60 days late. Some companies raise late users penalty rates as high as 29.9%.

You might not only get a penalty rate, but [in some cases] you also lose that 0% intro rate you thought you would have for nine months, so its really important to stay on top of things, says Credit card expert for Credit.com Beverley Blair Harzog

Students who already have a checking or savings account with a bank should start their search there, as many banks extend special rates and offers existing customers, suggests Scott Scredon, director of public relations for CredAbility.

Once a card has been picked, Harzog suggests parents sit down with their student to go over all of the fine print, which can be difficult even for a seasoned credit-user to understand.

Thats where all the gotchas are, says Harzog. Thats where youre going to find out what the real value of the card is.

No matter the type of card, one rule remains the same: Students should strive to pay the balance off in full, on time, every month.

I think a lot of times, the initial reaction is to use the card immediately for things that you could really use your existing funds for--that could be a meal or clothing or game tickets, says Scredon. You really want to try to save that card for true emergencies.

Secured Cards

For students looking for a different route or arent eligible for a credit card, Harzog suggests looking into getting a secured card.

As long as they pay their balance every month, its a very good way to build your credit while youre still in college, she says.

A secured card requires a cash deposit that then becomes the credit line for the account. For example, if a student puts in $200 in the account; he or she can charge up to $500.

Never go over your limit because that kind of defeats the purpose of when youre trying to build a credit history, says Harzog.

When shopping for a secured card, the experts suggest finding one that doesnt charge an application fee and small annual fee.

Students should also make sure their secured card issuer reports their payment history to the credit bureaus to start establishing a line of credit.

Build Now, Reap Rewards Later

Building a solid credit history can really benefit students later on in life. A positive line of credit can help a students eligibility for better loan rates when the time comes to get an apartment or house or buy car.

Over a lifetime, it could save you hundreds of thousands of dollars in the difference in interest payments between mortgages, cars, etc, says Larson. If you do have a bad credit history, its going to be very difficult for you to do any of those things.

Credit card mistakes can be very expensive; even one or two late payments can cause students to lose points on their credit scores or trigger a higher interest rate, warns Harzog.

In addition to making it more difficult to obtain new credit, a weak credit score can also hurt a students employment chances. Scredon says that many employers, especially in financial areas, check candidate's history to see if they are responsible with money and credit.

You certainly dont want to be spending four, five, six years in college working hard getting a bachelors degree or masters degree and then finding out that a poor use of credit is somehow going to reflect on you when you go to look for a job, says Scredon.