Another provision, though, was a huge game changer for college students: In order to get a credit card under age 21, you have to prove you have the income to make the payments, or get a co-signer.

This, I think, is good, for a lot of reasons. In years past, we’ve seen campuses crammed with credit card lenders, offering t-shirts and snacks and movie tickets to anyone who passed along their personal information or signed up for a card. There wasn’t a whole lot of education involved, and as a result, students were graduating with an average of $4,138 in credit card debt. Not good.

But not building a credit history isn’t good either, and to do that, you need to borrow money responsibly. College is a good time to start. So what’s the solution?

First of all, I don’t think it’s a good idea to co-sign on a loan or credit card for anyone, for any reason. When you co-sign on a loan or credit card, you’re putting your credit on the line. If the person you’re signing for – in this case, your son or daughter – slips up by paying late, missing payments altogether, or defaulting, your score is going down the tubes right along with theirs. And in some states, creditors can collect the unpaid debt from you without first trying to collect from the borrower, which means that in addition to a bruised credit score, you could be stuck with the balance – as well as late fees and collection costs. Federal Trade Commission studies have shown that when co-signed loans go into default, three out of four co-signers end up paying the loan.

In this case, if you want to help your student start building a credit history this coming semester, and he or she doesn’t qualify for a card on their own, your best bet is adding them as an authorized user on your card. From that position, they’ll get their own card, which will go on their credit file. The charges will come on one bill, however, so you’ll be able to collect the money and make sure the payment gets in on time each month. You can also monitor his or her spending, if you’d like, or, with some cards, set the credit limit lower to keep things in check. Keeping the coupon book in your hands means you get to protect your credit, and give your kids the opportunity to build theirs.

I’d like to open my first credit card and am looking for some advice. I am a year out of college, so I won’t be spending a ton of money on the card, under $1000/month (and plan on paying it off immediately every month). Since I won’t be spending much money on it, I would like a card with rewards that I will be able to realistically use. Besides that, being new to the credit card search, what else should I look for? – Nicole, Washington, DC

Opening your first credit card is a step in the right financial direction! It’s important to establish your credit early on – it’ll determine your eligibility for loans, mortgages, and new lines of credit throughout your lifetime, and your credit history is a big part of that credit score. For more about the breakdown of how your credit score is determined – and what qualifies as a good score – take a look at this post from my blog and watch this video from the Today Show this morning.

Next, you should know that $1,000/month is actually considered to be a very active user by lenders. It’s a good idea, though, to limit your spending to what you know you’ll be able to pay off each month. Since you plan to pay your full balance, interest rates might not play a big role in your decision – but it’s something to consider if you think you might use it if you had an emergency. These days, it’s tough to get a good interest rate – especially if you don’t have much of a credit history.

Despite what you might think, card issuers look at a “blank slate” and automatically view it as being a higher risk, as a measure to protect themselves. You can, of course, prove them wrong by paying your bills in full and on time each month, but that will take a bit of time. If you have some credit established (which you should if you have student loans or a car loan), and you’ve maintained good standing with your lender, then you can expect to get fairly low interest rates. “You should expect 7.9% from a credit union, or 12.9-14.9% from a bank or card issuer,” says John Ulzheimer of Credit.com.

Credit history or not, don’t panic if you get turned down for a card. New legislation regulates the age at which you can open a credit card (21), and in the credit crunch, issuers are becoming choosier about which customers they approve. So if you get turned down, try opening a secured credit card. A secured card allows you to give the issuer a certain amount of money upfront, which then becomes your credit limit. After about 18 months of good behavior, most of these cards will turn into a regular credit card.

However, if you do qualify for a credit card today, it’s a good idea to shop around before you open an account. Try lowcards.com to look at the options available. When it comes to rewards programs, Ulzheimer warns that there are some traps to be aware of. “Rewards cards are generally designed to reward the issuer rather than the cardholder,” he says, and many have annual fees. “Cash-back cards are the best of the breed because cash has no blackout dates,” says Ulzheimer, “and one that I like, that doesn’t have an annual fee is the cash back card from Discover.” Take a look around and decide what will work best for you.

And if you really are planning to charge and then pay off $1000 a month, you want a credit limit that’s significantly higher. Why? Because one of the things that determines your eventual credit score is utilization, the amount of credit available to you that you’re actually using. If you get a credit limit of $1500 and use $1000, you’re using 66% and that’s way too much. Try to use only 10 to 30 percent of your available credit in the beginning to establish the best score. Use a debit card for the rest of your spending. Then, when the card issuer offers to raise your limit, you can say yes and charge more.

Once you open the card, be sure to maintain good standing with your lender. Two simple rules? “Never revolve a balance, and never miss a due date,” says Ulzheimer. “This keeps your issuer happy, FICO happy, the credit bureaus happy, and everyone happy.” Also, make sure you don’t get into the dangerous habit of using a credit card to substitute for income. It’s a really big hole to get out of if you do – and at a young age, it’s best to keep yourself from digging it at all.

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I want to gain better control over my money by using my debit card instead of my credit card, but am not sure what the different effects will be on my credit and finances. Can you explain the differences? – Megan, Ohio

Megan,

There are some pros and cons to both credit and debit cards – let me break it down.

Debit Card Pros

·     You’re automatically living within your means. You’re spending your own money that you already have, which means don’t have to worry about paying interest.  (The only exception is if you overdraw your account.   Make sure you have told your bank you do not want overdraft protection.)

·     You tend to spend less. That’s right – debit cards can make you more frugal. When using a debit card instead of a credit card for purchases, you’re likely to focus on spending less. (You also tend to spend less when you use cash instead of your debit card – and even less when that cash is a larger bill.)

·     No late fees. Without a bill, you’re also without a due date – meaning those pesky late fees won’t be an issue.

Debit Card Cons

·     Fewer perks. Perks like miles have actually picked up a bit on debit cards, but they’re still greater on credit cards.

·     Overdraft fees can add up. If you don’t opt-out of overdraft protection, fees for spending more than you have can add up.   Another reason to just say “no.”

·     Administrative hassles. If someone steals your card and makes purchases on it, you’ll be able to get that money back. However, it can take a while – sometimes a week – and when that money is needed for paying bills and household expenses, you can end up incurring more expenses just to keep on top of things until you’re reimbursed.

·     Account blocking. Places like hotels and gas stations will often hold a certain amount of money in the case that something were to happen. When you use a debit card for that hold, the block can make it tough to spend your own money even if you have plenty.

Credit Card Pros

·     Track Record. Building up a credit history is key, so when it comes time for you to take out a home or car loan, the lender can decide if you qualify and what kind of interest to charge you.

·     Rewards. From frequent flyer miles to cash back, credit cards often offer consumers excellent rewards just for using their card.  However, it’s important to remember to watch your spending, still – research shows people tend to spend more on rewards cards than those without.

·     Consumer protection. If you are legitimately dissatisfied with a purchase or a service, and would like to withhold the payment, your issuer will generally stand by you.

·     Zero liability. If your credit card information is stolen and there are unauthorized transactions completed, after you report the theft you don’t have to worry about not having access to your funds while the bank sorts out the problem.

Credit Card Cons

·     Interest. This is a big one. If you don’t pay your full balance each month, you’ll rack up interest charges – 29 % is not unheard of.  That’s an expensive ouch.

·     Late fees. If you don’t pay your bill on time every month, you’ll not only have to pay a fee, you’ll also take a hit on your credit score.

·     Temptation. When you use your credit card, it can feel like it’s not “real money.” Customers tend to spend more on their credit cards than they do on their debit cards or with cash, and uncontrollable spending will quickly turn into excessive debt.

So, in answer to your question, you gain control of your money by using that debit card for every day purchases — and making sure you always know how much money you have in the account.  (Online banking is a big help!)  For the benefit of your credit score, however, you should not only have a credit card, you should use it for a small purchase once a month, then pay it off in full.

-Jean

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Hello Jean: Listening to you in our national sales call was great! I just have a question. I’m having some problems credit wise. #1 I don’t know what my credit looks like and I don’t trust the websites to check it. Any suggestions? #2 I don’t think I have established my credit at all, is there a way you recommend to establish and build it with out a cosigner?

Hi Allison: Good question.  You can — and should — know what your credit looks like, starting with whether you have a credit history at all.  Go to annualcreditreport.com and pull a free credit report from one of the three major credit bureaus.  (You’re entitled to one free one from each bureau each year and should take advantage to check your credit by pulling them on a rotating basis every four months.)  Don’t worry about trusting this site.  It’s secure.  If you find that your credit is thin or non-existent, the only way to establish it is to borrow money from a source that reports to the credit bureaus — like a credit card, car loan, some cell phone companies — and pay it back.  And to keep your credit in good shape you want to pay it back on time.  If you aren’t 21, you have to prove that you have a source of income to support a credit card (which you may be able to do with your mark. sales).  Otherwise, if your parents are AmEx members, see if they’ll get you a supplemental card on their account.  The nice thing about AmEx supplemental cards for college students is that they only report your good behavior to the credit bureaus and your parents have the ability to put caps on your spending.

Good luck!
Jean

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Caroline,

You’re right – just like Americans have been tightening their belts when it comes to their spending, lenders have had to do the same when it comes to lending. Your risk factor as a customer depends on your credit score, which helps lenders understand what kind of a customer you’ll be before they take you on. Your credit score is determined using five factors:
35% Payment History. Paying your bills on time and keeping things like bankruptcy and collection accounts off your record will help keep your score high.
30% Utilization Ratio. This is also called your credit-to-debt ratio. You only want to be using about 10% of the credit you have available to you at any given time, so make sure you monitor how much you’re spending each month.
15% Account Age. Keeping your accounts open for long periods of time shows that you’re able to maintain a good relationship with lenders.
10% Account Mix. Having a wide range of account types – a credit card, car loan, and mortgage, for example – shows you’re able to maintain a variety of debts.
10% Account inquiries. Checking your own credit score or report won’t impact your score, but when you’re applying for a credit card or loan, lenders will look at your credit history to determine what kind of customer you’d be – and those inquiries will have a small impact on your score.

Your credit score will be higher if you maintain the most desirable status in each of these categories, and will go down as your standing slips. Scores range from 300 to 850, and depending on where your score falls along that spectrum will determine your riskiness as a customer.

• 760+ — Very Good. You’re considered to be a low credit risk by lenders. You’re responsible with your accounts – meaning you pay them on time and don’t max them out – and will qualify for the many of the best interest rates.

• 700 – 760 – Good. You might have made some late payments in the past, but your accounts are all up-to-date today and you don’t have a lot of debt in your name. You might not qualify for the best interest rates, but the ones you’re offered will still be competitive.

• 650 – 700 – Fair. Your credit history may have a few older bumps and bruises, or you could have a lot of debt account or a lot of credit inquiries because you’re looking to open a new account or take out a loan. You might struggle a bit to find a loan with a good interest rate.

• 600 – 750 – Bad. If your accounts show a lot of late payments, bankruptcy, or collections, you’ll be considered a high risk. To protect themselves, lenders might only offer you high interest rates, or they might deny you altogether.

• Below 600 – Very Bad. You’ll likely struggle to find a lender that will accept your applications. If you do find one, you’ll probably have a high interest rate, or you’ll probably need to make a large down payment or have a co-signer. Avoid excessive shopping for loans, work to clear any collection accounts, and make sure to pay your bills on time.

If you’re dissatisfied with your score, try to follow the guidelines in the category above. Using the JeanChatzky Score Builder can help you tackle negative items on your credit report and correct them, so you see your score go up over time. Having some guidance to help you get on track will help you feel financially secure.

- Jean