Student Credit Cards: Safe Rules for Millennials

NEW YORK (MainStreet) — Millennials who are heading back to their college campuses might be obtaining their first credit card, which can help them build their credit score.

Owning a credit card comes with its caveats, risks and rewards, and college students should be aware of how it will affect their credit score in the future, said Julie Myhre, editor at NextAdvisor.com, a Burlingame, Calif. website which reviews consumer services such as credit cards and car insurance companies.

Millennials should check out credit cards designed specifically for college students, because they do not require the higher credit scores, she said. Since many students have little or no credit because of a lack of credit and payment history, getting the right card can help them establish a pattern of paying their bills on time.

Credit card issuers who offer student-specific cards usually require a minimum FICO score of 660 to 740 in order to get approved, said Myhre. FICO scores range from 300 to 850.

Finding the lowest interest rate will help students manage their debt, Myhre said. Most credit card companies will give consumers an estimate of the annual percentage rate or APR for their card before they are approved. Students should expect the APR to range from 11.99% to 23.99%, depending on their credit. Rates that are above 24% should be avoided.

"Since most college students don't have any credit, it is important to find the best card for your needs," she said.

Interest rates correlate with your credit score and will decrease as your credit score improves. For the best student credit cards, go here.

Students should find a card that does not have an annual fee even if they are receiving rewards such as cash back, she said.

"There is no reason that they should pay an additional annual fee even if they get rewards," Myhre said. "Avoiding that can save them $100 a year."

Another consideration in choosing a card is whether you want to get cash back on your purchases or obtain 0% interest for a short period of time, which is usually less than a year. Many cards will give consumers up to 5% back on purchases for groceries, gas or at movie theatres, which can add up quickly.

Not having to pay interest can help if you purchase textbooks and use your credit card for them or need it to pay off an existing balance on another credit card, she said. Students need to be aware of when the grace period ends and try to pay it off before the new interest rates of 13.99% to 23.99% kick in.

"The whole point of getting a credit card is to build credit and understand credit," she said. "If you plan to use it for regular purchases, a cash back card will be in your favor. It is a perk for your purchases."

Students who are holding down a part-time will be more likely to get approved for a credit card, but will not get a better interest rate than ones who are not working.

"Students should remember that if starting a job in a month, they need to account for that salary in their application," Myhre said. If your salary is low or you don't have a good credit score, many credit card companies will require that you add a co-signer like Mom or Dad to ensure the payments will be made.

Having a credit card, even if it is co-signed by a family member will help you build your credit score as long as you make your payments on time. If you are just an authorized user on a card that your parents gave you to use, it will not impact your credit score positively or negatively, she said.

While establishing your credit when you are younger can help your credit score later, students do not need to rush to obtain a credit card, said Scott Smith, president of CreditRepair.com, a Seattle company which helps consumers with reclaiming their credit scores and reports.

"Are you an impulse buyer or do you tend to handle money responsibly?" he said. "Be honest about this. If acquiring a credit card will just worsen your addiction to buying stuff, then maybe you'll end up overextended and eventually worsen your credit standing instead."

Once students receive a card, they should be aware of how often they use their card, Smith said.

"We typically don't recommend one card issuer over another," he said. "Just remember that all of them are in business to make a profit at your expense. In other words, no matter what their marketing hype may imply, the credit card companies aren't charitable organizations with your best interest at heart."

Some students should wait until after graduation and are employed before applying for a credit card, Myhre said.

"Students who are considering a credit card need to know what they are getting into," she said. "They are going to have to make payments. It is not a black of hole of money to spend and can ruin your credit score and make it harder when you try to lease an apartment or sign up for utilities."

—Written by Ellen Chang for MainStreet

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