What to Tell Your College Kid About Credit Cards
College students juggle plenty: part-time jobs, research projects, dating, keeping up with the family at home.
So I'd like to go out on a limb and say most college students are more focused on their GPAs than on their credit scores. And it's way too easy to make some really dumb moves on campus that can ding your credit score.
Lower scores mean higher costs when taking on adult-size purchases, such as car loans and mortgages, down the road.
Since 2010, credit card companies can no longer offer T-shirts, coupons for free pizza, coffee mugs or other gifts on campus to college students who agree to fill out a credit card application. They can still market cards on campus — just no freebies.
If a student is younger than 21, it is now tougher to get a credit card. But it's doable. A credit card can be opened if consumers under 21 can prove they can afford payments or have a parent or someone else who is older co-sign.
"If they want to get a credit card, they're still finding ways to get credit cards," said John Ulzheimer, president of consumer education at SmartCredit.com in Atlanta.
It may remain fairly easy to open credit cards at a store or even a Visa, if the card issuer can verify that applicants have a job and some income, Ulzheimer said.
College students still can get into plenty of trouble when it comes to credit.
Todd Albery, CEO of Detroit-based Quizzle, a credit-information website that's part of the Quicken Loans family, said he can easily think of two areas that cause college students to have lower scores. We're talking about high credit card balances and credit inquiries.
Albery noted that many students don't know that just applying for new cards can damage a credit score. It's not as bad as missing payments, but it can add up.
"So you may want to think twice about trying to save an extra 10 percent on your next purchase" by opening yet another store-branded credit card, Albery warned.
Students who have credit cards should not use plastic as if it's the same as cold cash. They might have seen parents pull out plastic for everything to build up airline points or other rewards. But students can run into trouble if they buy items like pizza or jeans and just keep charging.
Credit-scoring systems consider something called credit utilization, or the amount you owe on your card divided by the credit limit. You face a lower score, the more you use up that credit line.
If you charge $100 on a card with a $200 limit, it can ding your score.
"Many people don't realize how much their credit score suffers when they put too much on their credit card and can't pay it off," Albery said.
Generally speaking, lenders want to know how much of your available credit you're actually using. One realistic range of credit utilization, Albery said, is to use less than 25 percent of your available credit.
Experts point out that FICO says consumers with the highest scores typically use about 10 percent of their available credit.
Even students who don't have a credit card can get in trouble with their scores.
Gerri Detweiler, director of consumer education for Credit.com, notes that over the years she's heard from many college students who graduate and are shocked that their credit scores have been hurt by unpaid utility bills.
They all move out of the house or apartment they rented off campus, and no one pays the bill. The utility bill goes into collection and the student with the name on the bill gets hit on the credit report. Such a move might hurt a student's score by 50 points or so.
"It's easy for a bill to slip through the cracks and go unpaid," she said. It could even be an honest mistake, such as assuming a medical bill was covered by insurance.
Parents who are worried about credit may want to help a student build a credit history by adding a child in college as an authorized user on a low-balance card. The parent or card holder is responsible for the bill, of course, not that authorized user. So you really want to make sure that the student understands the limits. After all, a parent's score could suffer if the student goes overboard and maxes out that card.
On the plus side, when a parent authorizes a child as a user, Ulzheimer noted, the parent is easily able to kick the child off the card if the student abuses the card. It's harder to do if a parent co-signs for a card with a student.