Choosing your first credit card (or helping your child get started)
A few weeks ago I got this question from a parent of a former student and decided it would make a great post as there are many things to consider. So here we go …
Most college students are taking on debt and have little to no income. Therefore, finding a credit card with zero annual fees is essential.
The point of this credit card is to help you build a good credit score. Since you have little income, the rewards systems and points do not matter and should not be the focus. Most of these systems have an annual fee.
Ask your bank if they have a student credit card. This might be a good place to start plus it will be easy to see your bank and credit card transactions all on the same platform.
If your existing bank doesn't have a good option then search Google for “best student credit cards.” Remember the main focus is to find a credit card with zero annual or monthly fees and it is always a good practice to check the reviews on anything you buy.
If your child is paying the statement balance in full each month, they will not have to pay interest. All credit card interest rates are predatory so please make sure your child understands that they need to pay the statement balance each month.
Using your credit card effectively
Building good credit means using 30% or less of your credit limit each month. If your limit is $500, the max amount charged each month should be $150.
Students can build a good credit score by putting just 1-2 purchases per month on their card and paying off the statement balance in full each month. Paying for subscriptions via your credit card can be an easy way to automate building a good credit score (don't forget to automate the payment and set a reminder to review your checking account balance before the payment is withdrawn).
Another consideration
A few things to know:
Not all banks will report the credit card activity to the credit bureaus for an authorized user. If that is the case for your bank, then adding your child as an authorized user on your credit card will not help build their credit score.
When adding an authorized user, you do not have to give your child a copy of your credit card (the bank will offer to issue one in their name). Your child does not have to make purchases on the card to get the credit reporting benefits.
The authorized user is not responsible for the payment, even if they made charges. You still carry all the responsibility for this credit card.
This is a really easy way to give your child a head start on building good credit but it is only a viable option if you are successfully managing your credit card.
What if my child doesn’t qualify for a student credit card?
Some credit cards, even student credit cards, require a credit score to qualify. This can be an impossible qualification for many students who are getting a credit card to start building their credit score. If this is the case for you, try a secured credit card. Use Google to search “best secured credit cards” to find a card that could work for your child.
Here is how it works:
A secured credit card requires a deposit which then becomes your credit limit. This is usually between $200-$500.
Make at least 1-2 purchases a month
Pay the statement balance in full each month. With a secured credit card, your deposit is not used for your monthly payments so you still have to submit your payment each month.
Continue for 6 months with on time and in full payments. After 6 months you should be able to convert to an unsecured credit card and get your deposit money back. It takes 6 months of credit use to generate your first credit score. If you want to switch to a student credit card at this point, you should be able to qualify.
If your child took my personal finance class, they researched secured, students and rewards credit cards. Ask them what they found and which card seems to be the best fit.
Need additional credit card help?
Sign up for my credit card class!
Disclaimer: I am an educator, not your personal financial advisor. Please make sure to do your own research before moving forward with any actions discussed in this blog post.
Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!