College students have grown more responsible about credit card usage since the Credit CARD Act of 2009. While college students are being more conservative with money and credit these days, it's important to know the reasons why you should use a credit card. So here's what all young adults should know about the responsible use of credit cards and why it's an important part of sound money-management.
The CARD act and what it did
If you went to college anywhere in the United States before 2009, you likely remember being bombarded with credit card offers on campus. It was common practice for credit card companies to approve college students who didn't have the income to justify the cards. They also lured students in with "freebies" such as t-shirts, free food, and other goodies. It's no wonder the average college student graduated with $4,100 in credit card debt back then.
The CARD Act put the brakes on these practices by making it tougher for students under the age of 21 to obtain a credit card. Credit card companies were required to stop their predatory methods and prohibited from issuing cards to people who were under 21 and didn't have either documented income or a cosigner.
This caused student credit card usage to drop. In 2010, 42% of college students had at least one credit card. By 2012, this figure had fallen to 35%. The average revolving balance carried by college students plunged to $499, according to a study by Sallie Mae.
In short, the CARD act did wonders to address the bad side of credit card usage. However, there are two sides to the story.
Credit cards aren't all bad
It's great to see that those college students who have credit cards are using them more responsibly. However, the 65% of students who don't use credit cards at all could be doing themselves a huge disservice.
Specifically, responsible credit card usage helps to build credit, which students will need later in life. In the real world, it's much easier (and cheaper) to rent an apartment, get an individual mobile phone plan, or finance a car or home if you've established a good credit history. After all, who wants to graduate college, get a good job, and then find themselves unable to obtain many of the things they spent years working for?
Getting a credit card and using it responsibly is an excellent way to improve your credit score in nearly every possible way. Consider the information that goes into your FICO score (the most widely used credit score) and how using a credit card can help improve it.
- Payment history (35% of FICO score) -- By simply paying your credit card bill on time each month, you'll see your score improve over the years.
- Amounts owed (30%) -- This refers mainly to the percentage of your available credit you're using -- not the actual dollar amount. By keeping your balances low, relative to your credit limit, you can maximize this category -- and pay little or no interest.
- Length of credit history (15%) -- Obviously, if you wait until you graduate to get your first credit card, this category of information won't be a strong point. However, if you already have several years of established credit, it can give your FICO score a nice boost.
- Types of credit used (10%) -- Lenders want to see that you have a "healthy" mix of credit accounts, like mortgages, auto loans, and credit cards. While most college students won't have the first two, establishing one type of credit account is certainly better than nothing.
- New credit (10%) -- The more often you apply for credit, the more "new" accounts and credit inquiries you'll have. Basically, if you apply for one credit card and leave your credit alone for a few years, your "new credit" information will have a positive impact.
The best part is that building your credit score up for your "adult" life doesn't need to cost you a dime, so long as you use your credit card responsibly. It isn't too hard to find a student credit card with no annual fee, and as long as you only charge things that you can pay off in full each month, you won't pay any interest.
Get a credit card, but use it responsibly
As I mentioned before, in order to get a credit card while you're under 21, you must either have enough income to justify it or convince someone (like a parent) to cosign. I recommend getting your first credit card as soon as you meet one of these requirements, so long as you're prepared to use it responsibly.
Finally, for those who don't necessarily want a credit card, consider a secured credit card instead (check out this article for more on these), which works the same way, except you're required to put down a deposit -- effectively preventing you from spending money you don't have.
The point here is that the college years are an excellent time to establish a great credit score that will serve you for the rest of your life, as well as to develop excellent financial management skills. So, pick one credit card, use it wisely, and watch your score go up.
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