How your kids can establish credit while they're in college

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For good and for bad, college students have limited access to credit. If you were in college anytime before 2009, then you may find this hard to believe, but it's true. The reason for its validity is because the Credit CARD Act was passed in 2009 and amongst other things it:

  1. Stops credit card companies from being able to advertise and sign up college students on college campuses
  2. Requires anyone under the age of 21 applying for credit to have a co-signer or proof of income.

This regulation makes it nearly impossible for college students between the ages of 18–21 years old to get credit cards, and thus get into debt that they may not be able to manage appropriately. 

The unfortunate consequence of the regulation is that it makes establishing credit for the first time and building credit history very difficult for college students.

There’s only a handful of ways for college students to establish a credit history without having a parent co-sign (which we don’t recommend). So here's a guide to help your kids figure out if they want to establish credit during college and if so, how to do it. 

Secured Credit Card

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The secured credit card is one of the most common ways that college students under 21 years of age can establish credit history and it is also one of the safest.

CEO of LexION Capital Management, an independent wealth management firm, Elle Kaplan says that she recommends secured credit cards to families at her firm. 

Elle says that she’s quick to recommend them, because they “don’t require a credit score to get approved (which is usually the case). Instead, they require that you put up a small amount of money as collateral, and use that cash as your credit card limit. It’s a good option if you want to make timely payments that will up your credit, but can’t get approved for an unsecured credit card.”

Essentially, a secured credit card works just like a regular credit card in the fact that it can you can use it to buy the same things. The big difference is secured cards typically require a deposit that work as a credit line. 

Debbi King, a Personal Finance Coach at The ABC’s of Personal Finance, agrees that a secured credit card is the best option for a college student under 21 years old. “A regular credit card would require a co-signer which is never a good idea. Just make sure it is a secured card that reports to the credit agencies,” she says.

To receive access to your credit line, you first need to make a deposit of, say, $500 to the issuer before, you can use the card to make purchases. In essence, you are borrowing your own money, but building a credit profile at the same time. 

Unsecured Credit Card

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Unsecured credit cards are the most widely known and used tool for establishing  and building credit history. Unsecured credit cards, however, are only beneficial to the user if that person uses them wisely. They can be very dangerous if used in the wrong manner. Also, they can only be used by people who are 21 years or older or can prove that they have steady income. 

President and Founder of CompareCards.com, Chris Mettler, believes that it’s a good idea for college students to have one credit card in their name. He says, “As long as they [college students] are able to responsibly manage it and not make purchases they can’t repay. Many first-time credit card users don’t realize the repercussions that can come with charging items that incur interest.” 

However, the fact that credit cards can be easily abused means for some finance experts that most college students should not use them. 

Michael J. Kostelnik, a Financial Advisor based in Cleveland, Ohio, is one financial expert who believes that most college students should not use credit cards. “Most students have no means to pay them off yet. Combine a credit card with mountains of debt after graduation and only the hope of a job, and you have a bad situation,” says Michael.

Michael’s opinion is that students should wait until they’ve graduated and have a secure job to get a credit card. 

If you still insist on getting an unsecured credit card, then there are a few criteria that the card  must meet. Robert Harrow, a credit card expert at ValuePenguin.com, explains: 

  • Make sure the credit card issuer reports to one of the 3 major credit reporting agencies — TansUnion, Equifax, or Experian. When it comes to building credit, this is the most important factor. If your on-time payments don’t go reported, you will be doing yourself a dis-service.
  • I  advise students to get a credit card with no annual fee. Age of credit plays a huge role in your credit score. You never want to cancel your first credit account for this reason. If your first credit card account has an annual fee, it may end up costing you dearly in the long-run, especially if the card doesn’t earn you any rewards to make up for it.

Credit Builder Loan

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The last financial product that college students can use to build credit is called a credit builder loan. Credit builder loans are one of the most widely unknown credit building products, but they are  the safest and require the least upfront monetary commitment. 

At Self Lender, we offer credit builder loans to our customers. Here’s an explanation of how Self Lender's credit builder loans works in 3 easy steps:

1. Get Your Credit Builder Loan

We instantly open a savings account and lend you $1,100. Your money stays in your account and pays you 0.10% APY over 12 months. 

2. Make On-Time Payments

Pay $98/month for 12 months to pay back your loan. Your payment history is reported to the credit bureaus. 

3. You Did It!

At the end of your term, you’ve paid off your loan, and your savings account matures with $1,101.10. Great job building 12 months of payment history. 

As you can see, credit builder loans function like savings accounts that help you build credit. Essentially, a loan is extended to you, but it is put in a savings account, and you can't access the loan until you pay it off. While, you're making payments on your loan, we're reporting the payment history to the credit bureaus. 

For more information on Self Lender, please visit https://www.selflender.com

How did you build credit when you were in college, or if you're in college now, how are you building credit? Send your answers to Hello@SelfLender.com.

Written on November 17, 2015

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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