College students often find themselves in precarious financial positions: harried by student loans, making minimum wage if they’re working at all, and receiving credit card applications left and right from companies that hope to prey on their lack of financial knowledge. Couple this with the fact that many students are handling financial decisions independently for the first time and it’s a recipe for disaster.
At the same time that all of these financial challenges arise, forward thinking young people may be considering the role of building credit in their overall financial future (or their parents might be). This raises the question: Can college students safely build credit without also building debt? And if so, what the best way?
Learn the Language
Before college students begin using credit cards, the most important thing they can do is learn the language used to talk about credit. Does your student understand how interest works and the difference between annual fees and penalty fees? Do they know what can cause their APR to increase? Students need to understand what credit card companies are saying before they apply for a card.
It’s important to build credit cautiously and intelligently, and with parental supervision if at all possible. One of the best ways to do this is by making college students authorized users for their parents’ credit cards. This strategy is known as “piggybacking” and it means that family members can benefit from each other’s good credit. Making a child an authorized user on a parent’s credit card also means that parents can keep an eye on their spending habits and make sure they aren’t acting irresponsibly.
Seek a Secured Card
Many people are unaware of the concept of a secured card – unless they’ve been through bankruptcy proceedings. What makes these cards different? Well, in many ways, a secured card is more like a debit card than a credit card. To use it, you have to pay into the card before you spend. If you don’t have the actual money, you can’t use the card. This can help college students stick to a budget while developing a credit history.
Become a Self-Lender
Did you know that you can give yourself a loan to build your credit history? It may sound strange, but it’s possible! These loans are known as credit builder loans and unlike a typical loan, you aren’t given the money right away. Instead, you apply for the loan, pay it off over the given term, and at the end are given not just the money you paid in, but also interest accrued as such loans are invested in a secure CD for the term. These loans allow you to build a positive credit history by paying for your loan on time, but also allow you to make money in the process.
If you aren’t sure that your college student is ready for a credit card, consider sticking with a debit card until they have a stronger handle on financial management. A debit card offers much of the same conveniences as a credit card, allowing students to leave their cash in the bank, but still draws directly from that account. It forces students to plan any spending in advance to make sure they have the money they need.
Building credit shouldn’t feel like a trap, but it commonly becomes one for younger college students. Students should take some time to learn about money management before they’re given the option to spend money they don’t really have through credit, but there are more options available to help them build these skills than ever before. With appropriate guidance, they’ll be ready for a credit card in no time.