Student credit cards and your credit score
Kathy writes:
My 19 yr old college soph. has NO interest in owning/using a credit card but I believe he should have one in order to establish credit so that when he graduates he will have an easier time of renting an apt./purchasing a car/setting up utilities. Currently his only debt is subsidized Stafford loan. Am I correct or should he remain without a credit card? Thanks.
A very good question. To establish a basic record of credit, a student loan is a good start, but to get the maximum benefit for building a high credit score, the FICO algorithm tends to like to see about 2 trade lines. Here’s a quick glance at a FICO formula scorecard presented by Fair Isaac to the Federal Trade Commission. It’s not the exact formula, but it gives you a good idea of what credit scores look for:
Take a look especially at strongly positive and negative numbers in the chart. Owning your home is a great score booster – logically, of course, it’s because there’s something for a creditor to seize if you default on a loan. In occupation, the higher your likely pay scale, the more impact. The longer you’re employed, the better.
Number of inquiries is attention-getting – once you get turned down more than twice, at least according to this scoring model, it rapidly begins to negatively affect your credit score. Once you exceed 30% of your credit line utilization – for example, you owe more than $300 on a credit card with a maximum limit of $1,000 – your score declines quickly.
Does this answer whether your son should get a credit card? The answer is tentatively yes if he only has the Stafford loan – look at the line titled # Rev trades outstanding – this is number of trade lines. Having 1 or 2 trade lines is a good thing. Having a credit card grants 16 points to the score on the line titled Dept St/Major CC.
I’d recommend the following based on this credit guide – which admittedly isn’t the exact formula of today’s credit score, but is close:
1. If your son can rent off campus with you as a cosigner or guarantor, that might not be a bad idea.
2. If he can work, even a little, that’s a good thing.
3. If he does get a credit card, take a look at our StudentPlatinum.com credit card guides for student credit cards to find a card that fits his needs. You might be asked to co-sign on it or provide some debt guarantee, and that’s not a bad thing.
4. If he does get a credit card, make sure he keeps credit line utilization under 15% of the maximum limit – no more than $150 balance on a $1,000 card, for example.
5. He absolutely should have a checking account and a savings account set up at a bank or credit union.
6. Don’t apply for more than a couple of credit cards – multiple inquiries can significantly damage a credit score.
7. Above all else, if he does get a credit cards, never, ever be late with payments. Ever. Be early or on time, always make at least the minimum payment, and strive to not carry any balance at all.
Getting started with a student credit card as a sophomore is also not a bad idea as long as he maintains a solid payment history, as the bonus for years on file goes up significantly around year 3 – once he graduates, having that trade line active and in good standing will be very helpful to him.
Originally posted from the Financial Aid Podcast.
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