Getting your first credit card used to be easy, back in the days of easy lending. Come orientation, students would be handed an application that was all but signed for them, rewarded with pizza or Frisbees, and given a credit card with almost no questions asked. Then came financial reform. Like post-graduation jobs, credit cards suddenly became less available to students, leaving many asking, “Where will I get my first credit card now?”
What the CARD Act Means for You
In the bygone days before financial regulation, credit card companies went all-out to court college students, many of whom had yet to move beyond cash or debit cards. They passed out food, tchotchkes and even travel vouchers, with an application slipped in. On that application, a student with no job could list her parents’ income rather than her own. Even though it was her very first credit card, she could spend as much as if she had her parents’ long and solid credit history. Her credit limit then reflected the income and history of someone who was in no way liable for her debts. The Credit CARD Act of 2009 dealt extensively with students in an attempt to ensure that college kids won’t run up mountains of debt on their cards. First, the law prohibited credit card companies from handing out goodies in exchange for applications, banned them from marketing credit cards on or within 1,000 feet of campus, and required that colleges disclose any special relationships with the companies. It also required the issuers to consider the applicant’s individual income, rather than his householdincome. No one can qualify for a credit card without a job or a co-signer with a steady cash flow. This last provision shook up how college students are approved for credit cards, and the terms of the cards themselves. shaken up the credit card world for college students.
If you want a working man’s credit limit, you need to be a working man
According to the Bureau of Labor Statistics, seven in ten college students aren’t employed, so they have no income to list. For an income-less college student to receive a decent credit limit or anything close to a reasonable interest rate, he’ll need his parents to co-sign the loan. That way, the parents’ income and credit history dictate the card’s terms, and issuers can rest assured that the person on the hook for the debt is actually able to repay it. Having a co-signer has distinct advantages. If you think you can handle it, you’re more likely to get a higher credit limit. You can also qualify for student credit cardsthat give rewards or have low interest rates. Almost no student cards have annual fees, while almost all secured credit cards do. The reassurance of a co-signer makes you a more attractive customer, so you’ll get a better product. Still, the co-signer requirement comes with its own difficulties, especially in unusual cases. A student whose parents are abroad or otherwise unavailable to sign a loan would be unable to get a credit card. The tragic case of an irresponsible parent running up debt on a child’s card is rare but not unheard of. Conversely, if a student misses payments or runs up a lot of debt, she’ll bring down her parent’s credit score along with her own. Or, for whatever reason, a college student could simply not want her parents to see her credit card statement.
For the co-signer-less, consider a secured credit card or look at credit unions
There are options for students who can’t or don’t want to take the co-signer route. For those without a steady stream of income or solid credit history, credit unions offer better terms than a traditional bank. Credit unions are generally far more sympathetic to students with a limited credit history than their for-profit counterparts. They’re more likely to overlook a thin file and take the risk in offering a young adult his first credit card. Some universities even have affiliated credit unions. A secured credit card is likely to be the most accessible as it is exempt from the CARD Act’s income requirements. Backed by collateral deposited when the account opens, a secured credit card helps to establish a good credit history for those who don’t qualify for a regular credit card. We at NerdWallet don’t often recommend a secured credit card, as it comes with annual or monthly fees, but a reasonably priced secured card can develop a solid payment history. Here, too, credit unions can step in. They usually don’t levy annual fees or hit you with unexpected penalties. A number of credit unions even offer secured cards with rewards.
The importance of building a credit history
An unexpected consequence of the CARD Act could be that students wait until they graduate before getting their first credit cards. Low credit limits and fewer perks, or strong parental oversight, could be a significant deterrent. If someone waits until she has a steady job before getting her first card, she’ll find herself in a bind. Because she has no credit history, credit card issuers will be reluctant to lend to her. This could affect the size of her credit limit, an unwanted hindrance when the one-time expenses of moving out of the dorm and into an apartment begin to pile up. She may find renting itself difficult: many landlords require a copy of their tenants’ credit histories. A limited credit history can also impact employment prospects, insurance premiums and more. Ideally, a student would use his first credit card to build up a solid history rather than maxing out the card on necessary expenses. If having a parent as a co-signer is not an option, the fees of a secured card might be offset by lower interest rates down the line.
Getting a credit card: a student’s perspective
I entered college before the Dodd-Frank bill prevented credit card companies from giving out promotional materials to students, and when I arrived for orientation, I was immediately handed a Frisbee emblazoned with a bank logo, a free (oversized) t-shirt, and an application for a “student-friendly” credit card. Bombarded by so many choices, I made the only logical choice: pretend that credit cards don’t exist. As expenses began to pile up, however, I realized that a checking account could only get me so far. Fortunately, my parents were able to help me both by co-signing for the card and by giving me advice on what to look for and avoid. I began to slowly build a credit history by paying on-time and avoiding maxing out the cards. I’m relieved that I got my first credit card before I left college and was able to show that I would pay off my debts on time. If I had to contend with a razor-thin file when I approached banks, landlords and interviewers, I’d be pretty badly off. I’m also grateful that I had excellent advice in getting a credit card. I’ll be honest: I had absolutely no idea what an interest rate was, what kinds of fees I should avoid and what kinds I’d simply have to live with, or even which bank to get my card from. Now, of course, I curl up at the office with a cup of coffee and a thick stack of terms and conditions, but many students I know still don’t know what to look for in a credit card. Some choose a bank that’s close to college but far from home, or vice versa, incurring high ATM fees; some are, like I was, overwhelmed by choice and gravitate to a familiar name even if the terms are not favorable; and some sign up for a credit card with good promotional offers that quickly give way to high fees and interest rates. I didn’t do my research on my first credit card, but I lucked out. My advice to other students about to dip their toes into the overflowing pool that is the American credit card industry? Do your homework. Know what you’re getting into. You’re likely to keep your card for a long time, so make sure it’s one you can live with.
Check out our full list of student credit cards for the best deals!