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There is a reason credit card companies are no longer allowed to market their products within 1,000 feet of a college campus.
Before the CARD Act was passed in 2009 setting limits on credit marketing to students, card issuers regularly marked the start of a new academic term by setting up stands on campus and offering students T-shirts and other incentives to sign up for cards. Students proceeded to acquire high-fee, high-interest-rate credit cards, often with little understanding of how they worked.
These days, it is much harder for students to obtain credit cards. Students under 21 must have an adult co-signer to get a card or demonstrate that they have sufficient income, and the constraints on campus marketing have also had results. A study by Sallie Mae found that just 30 percent of students reported having cards in 2013, down from 42 percent in 2010.
Even among all millennials (defined here as those ages 18 to 29), credit card usage is relatively rare. A recent survey by Bankrate found that 63 percent of millennials have no credit cards, compared with 35 percent of consumers age 30 and over.
For a generation that watched its elders overextend themselves with credit and did not see the card-marketing offers that used to pervade campuses, credit cards may well seem like a less appealing payment option. And the string of security breaches at major retailers do not exactly make credit cards look secure.
But having a credit card can be useful, even for college students and 20-somethings. Most significantly, having a card and using it prudently can help establish a credit history, which in turn opens the door to lower-cost mortgages, car loans and more.
Young adults without credit cards "are making it harder for themselves down the road to get financing for a house or financing for a car," said Jeanine Skowronski, credit card analyst at Bankrate. Landlords and employers also look at credit scores, she added.
But with all the special offers and promotions out there, identifying the ideal credit card can be tricky, especially for a first-timer.
A college student under age 21 may find that the best option is to become an authorized user on a parent's card. "That's like a credit card with training wheels," said Skowronski. "They'll be building a credit history, and the parent is very present in the relationship the student has with that card and responsible for paying that bill." Many companies offer the co-signing credit card option.
Alternatively, some issuers offer cards tailored to students with limited credit histories but some income. These cards typically come with no annual fee and a relatively moderate interest rate or annual percentage rate. Some also have bonus or cash-back features that offer rewards when the card is used.
Capital One, for example, offers the Journey Student Rewards card. It has no annual fee, and cardholders earn 1 percent cash back, or 1.25 percent cash back for paying the bill on time. If you don't pay your bill on time, though, brace yourself for an interest rate of 19.8 percent. (Remember, too, that paying your credit card bill on time is one of the best ways to build a solid credit history.)
The BankAmericard for Students also charges no annual fee, and it offers cardholders 0 percent interest for 15 billing cycles. (After that, the interest rate rises to between 10.99 percent and 20.99 percent, depending on market rates and the cardholder's creditworthiness.) For cardholders with a big upcoming purchase that may take a few months to cover, the temporarily nonexistent interest rate is a plus—but it is important to keep in mind that the 0 percent interest rate will end. BankAmerica charges a fee of 3 percent of any balance transferred to the card, though.
Discover offers the Discover it Chrome for Students card and sometimes has special features offered for a limited time. The Chrome card offers no annual fee, no late fee on a first late payment and 1 percent cash back on most purchases. (If restaurant and gas purchases add up to $1,000 over three months, the card gives 2 percent cash back.) The interest rate on card balances is 0 percent for the first six months, but it then rises to between 12.99 percent and 21.99 percent based on the cardholder's creditworthiness.
Another option for college students and millennials is a secured credit card. This kind of card requires a security deposit: Most of the top cards require deposits of $200 or less, but one—the First Progress Platinum Select MasterCard Secured CreditCard—requires $300. On the plus side, issuers of these credit cards monitor your credit and send regular reports to credit bureaus, enabling you to build or rebuild your credit history.
With any credit card, it is important to pay the balance off every month. Experts also say it's a good idea to spend much less than your credit limit (below 30 percent is best), so you do not run into trouble paying the bill. If you do make a big purchase, like apartment furniture, and you need a few months to cover it, make sure to pay at least the minimum balance and ideally more.
Credit cards may have lost some luster with millennials, but old-fashioned credit histories still matter, and a credit card can be the best way to build one. College students and recent graduates who keep their card balances in check and search out the features they need will find credit cards a useful tool for shaping their adult financial lives.