College and Your Credit – a Primer for High School Graduates

Brendan Harkness

Brendan Harkness

Updated Aug 31, 2016

Every year I make it a point to speak with high school seniors heading off to college, and every year my message remains the same. In school, you can screw up on a test and if you study hard and focus, you can make up for it on the next test.

If you screw up on a mid-term, you can study harder and make up for it on the final. But in the financial/credit world if you screw up, it’s not a quick and easy fix and it can end up costing you for years to come.

Unfortunately, Credit 101 isn’t a course you’ll find in your college curriculum, which is why my goal here is to empower you with the knowledge and knowhow to avoid these costly mistakes. Without further ado, here’s are a few of the most important credit lessons I think every high school senior should know before heading off to college.

Laws in Place to Protect Students from Predatory Marketing

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (informally referred to as the “CARD Act”) protects students and consumers under the age of 21, credit card issuers must now:

  • Obtain proof of income before issuing a credit card to consumers under 21 years of age. If you don’t have an income, a credit card co-signer is required in order for the application to be approved.

  • Obtain prior consent before sending pre-approved credit card offers to anyone under the age of 21.

  • Obtain written permission to increase credit limits on accounts with co-signers for accountholders under the age of 21.

  • Cease all predatory lending practices and aggressive marketing tactics on or near college campuses.

Avoiding Credit Card Company Traps and Marketing Even with CARD Act Regulations

The CARD Act has made great strides in protecting students from predatory credit card practices. Still, young people have to watch out for remaining credit card traps. The most important advice I can give is that you read and fully understand the terms and conditions before you apply for a card.

Here are a couple of the most important things to watch out for:

  • Introductory Teaser Rates. Don’t be fooled by the 0% introductory teaser incentives. These offers can be great deals but introductory rates are temporary and you’ll want to pay close attention to the ongoing rate after the intro period expires.

  • Annual Fees. Many cards, especially those that offer rewards or cash back incentives, also include annual fees. In many cases the annual fee is waived the first year but it’ll kick in every year thereafter so it’s something to pay attention to, especially when there are a number of other credit cards on the market that don’t carry an annual fee. Be aware of all possible credit card fees before you make a selection.

  • Prepaid Debit Cards vs. Credit Cards. Prepaid cards have grown in popularity, especially with college students. Be aware that prepaid cards of any variety are not credit cards. Often these cards are marketed as a safe way for students to build and establish credit but the truth is that they do no such thing because like debit cards, prepaid cards are not reported to your credit reports.

Building Credit in College

Another question that almost every student faces is: “How do I get credit when everyone wants to see how I’ve managed?”

You actually have a few pretty decent options:

  • Start with a secured credit card. A secured card works just like a regular credit card except for the fact that the credit limit is backed or “secured” by a cash deposit that you make with a bank in exchange for the card. For example, if you opened a secured credit card with a $500 cash deposit, the bank would issue a credit card with a $500 credit limit. The drawbacks to secured cards are their low credit limits and fairly high interest rates. Your goal should be to manage the account wisely in order to build and establish credit, and then upgrade and move on to a traditional credit card. And, if possible, always pay your bill in full each month to avoid interest costs.

  • Become an authorized user on someone else’s credit card. As an authorized user you get a credit card with your name, granting you full “authorization” to use the card just like the primary cardholder. When someone adds you as an authorized user on their credit card, you essentially get all of the benefits of the primary cardholder but without any of the liability. You’re not responsible for the monthly payment and you have no obligation to pay the bill.  Authorized users benefit from the primary cardholder’s credit history because credit card issuers will typically report the account to the authorized user’s credit reports.

    If the account is well-established, with a long standing history of on time payments and has a low balance in relation to the credit limit, your credit and credit scores will surely benefit as a result. The opposite is also true. If the primary cardholder misses a payment or maxes out the credit limit, your credit will suffer too. If things go awry with the primary cardholder’s management of the account you can have your name removed from the account and it will then be removed from your credit reports.  Being an authorized user on a credit card is like having a credit card with training wheels.

  • Get a co-signer to vouch for you. A co-signer is someone who signs on a loan with you, accepting equal liability for the loan on your behalf. If you’re unable to make a payment, the co-signer is liable, right along with you. This means that if you miss a payment or default on the loan, both you and the co-signer’s credit will suffer. I’m including this option so that you know it exists but it’s not an option I like and it’s one I’d strongly advise against. Simply put, there are other, smarter options that work just as well — without the drawbacks and unnecessary risk for the co-signer.

  • Get a job. Under the CARD Act rules, young adults under the age of 21 can apply and be approved for a credit card as long as they’re able to show sufficient proof of income. This means getting a job. These days many college students are holding part or full-time jobs while earning their degree. It might not be ideal for some, but working your way through school isn’t unheard of and can help you get that first credit card.

How to Avoid Leaving College with Massive Credit Card Debt

This is my final piece of advice and it’s actually quite simple. It’s sticking to it that’s the tricky part. If you want to avoid leaving college with massive amounts of credit card debt all you have to do is watch your credit card spending and only spend what you can comfortably afford to pay off in full at the end of each month when the bill arrives. If you follow this one simple rule, credit card debt is a problem you’ll never have to worry about.

Learn the steps you can take to manage your debt here »

Remember to Use Credit Cards Wisely

Credit should not be feared and those who demonize credit cards and banks are ignoring the fact that when we get into debt it’s a voluntary act. Further, we need access to competitively priced credit, including credit cards. They provide for portable capacity and offer significant protections against fraud thanks to Federal law.

The golden rule is to always remember to use credit cards wisely. Manage the account responsibly by making every payment on time and never carrying a balance from one month to the next. Your efforts will be rewarded and your credit scores will shine.

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