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Credit Card 101: What Students Need to Know

Gone are the days of credit companies hawking free pizza and T-shirts in the university plaza in exchange for a student's signature on an application form. The CARD Act of 2009 did away with such tactics. Still, many young adults want to use a credit card to earn rewards and build credit, and many parents want their children to have something to fall back on in a financial emergency. At the same time, credit card use has its dangers, and parents and students should be informed when considering the options.

The New Reality on Campus.

Since the CARD Act took effect in 2010, credit cards cannot be offered to students on campuses and credit card applicants under 21 must have a cosigner or show proof of independent income. Thomas Nitzsche, a manager at the nonprofit ClearPoint Credit Counseling Solutions, says the only exception to the ban on soliciting new accounts that he is aware of is on-campus branches of banks and credit unions that offer school IDs that double as debit cards. Even then, students must show proof of income or have a cosigner. Given that most college students don't have a fulltime job, the decision to apply for a credit card is partially up to a parent or other adult willing to cosign.

Why to Get a Credit Card.

In addition to being a source of emergency funds, a credit card can help students prepare for adult life. Using the plastic to pay for purchases helps establish a credit history, which accounts for 15 percent of the FICO credit score. A good credit score can make getting an auto loan or renting an apartment easier (and cheaper), and some employers even check credit scores when interviewing for open positions. When building credit, it's best to keep the balance on a card below 30 percent of the total credit limit. This is especially important for students to remember, as many student cards have a relatively low credit limit.

Students who want to build their credit should check with the card's issuer and make sure reports go to all three credit bureaus -- Equifax, TransUnion, and Experian. Nitzsche cautions that some credit card issuers report to only one or don't report to any, and as a result, card activity doesn't help establish credit.

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Creating Safeguards.

There are dangers to opening up a line of credit, as well as benefits. Recall the media reports and neighborhood tales about students who max out their credit cards and leave school with an added debt burden. One explanation may be that many students didn't learn about personal finance while growing up. According to the Council for Economic Education, only 19 states require a personal finance course be offered in high schools; only 17 require students take the class; and just six require testing on the material.

Having a cosigner decreases the chances that students rack up credit card debt. For one, the responsible adult can teach the student how to use a credit card wisely. Those who are uncertain themselves can turn to one of the many online sources of free personal finance education and learn alongside the student. Cosigners also can request a lower credit limit than what's offered. A third option involves monitoring the student's spending by signing up to receive text messages when purchases are made or setting up an online account and occasionally checking the balance and purchases.

Recommended Cards.

Students and parents should discuss which card would be appropriate for their situation. Some banks, including small community banks, issue cards with features designed specifically for students. The following three offer rewards programs and don't charge an annual fee.

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  • Discover It for Students.

    Discover's student card offers 5 percent back on quarterly rotating categories such as restaurants, department stores, or Amazon up to a maximum and 1 percent cash back on all other purchases. An alternate Chrome card for students offers 2 percent back on the first $1,000 spent at restaurants and gas stations each quarter instead of cash back in changing categories. Both cards also double the cash back earned throughout the first year for new cardholders. Several other features may benefit students, including no foreign transaction fees and a fee waiver on the first tardy payment.
  • Citi Thank You Preferred for College Students.

    This card includes a rewards program that gives 2 percent back on dining and entertainment purchases and 1 percent on everything else. There's also an introductory 0 percent interest rate for the first seven months, followed by a variable 13.99 to 23.99 percent rate. Citi occasionally offers sign-up bonuses for new cardholders. The current incentive offers 2,500 bonus points to users who make $500 in purchases during the first three months.
  • Capital One Journey Student Rewards.

    The Journey card reinforces good habits by rewarding cardholders with a bonus 0.25 percent cash back when they make on-time payments (up to a total 1.25 percent back on all purchases). There's no foreign transaction fee, but the card does have a high 19.8 percent APR.

An Alternative to a Card of Their Own.

Another option for college students is to become an authorized user on a parent's card. Authorized users aren't responsible for charges made with the card, which means student and parents should have an open and honest relationship when it comes to money. If the student wants to build credit, it's worth checking with the card issuer to learn what can be arranged. Some issuers report authorized users' activity differently, some don't report it at all, and others report it as if the authorized user were a primary user. If the issuer does report an authorized user's activity, trust between cardholders goes both ways. If the primary cardholder (i.e., the parent) doesn't make on-time payments, the student's credit score could take a hit.

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