Establishing Credit for Your Student

It’s probably a good thing that today’s students, unlike their parents, are more likely to be handed a free t-shirt than a new credit card as they walk across campus. For students graduating in the 1980s and 1990s, credit card debt was a more likely millstone than student loans. Rules that went into effect in 2010 drastically reduced students’ access to credit cards.

While this is mostly a good thing—students with $30,000 in student loans don’t need credit card debt on top of that—it has some negative consequences as well. The most costly tends to be the challenge of establishing credit. Students without credit history often have to pay security deposits for utilities or need parents to co-sign their lease when they move off campus (or after graduation) and may have difficulties getting a credit card once they’ve graduated. And in circumstances where refinancing student loans is a good idea, good credit is a requirement.

In addition, once students do get their own credit cards, they tend to have very low limits—often in the $500 range. Again, there are pros and cons to this. The pros are obvious. The cons—beyond not being able to buy a plane ticket for a vacation—have to do with how credit scores are calculated. A person’s credit utilization ratio—the percentage of available credit they actually use—accounts for about 30% of one’s credit score. And the ideal ratio from a lender’s perspective is around 20%– about the cost of an evening out if your card has a $500 limit.

Credit card law in effect currently requires a co-signer for a student under age 21 to get a credit card and also prevents the under-21 cardholder from requesting a credit limit increase. To get a card without a cosigner, the student must provide proof of income.

You can choose to help your student build credit, and if you’re contributing to their education, you’ll probably reap some benefits as well: lower security deposits and not needing to co-sign their lease being among the bigger ones. You have a couple of easy options for this:

  • Add your student as an authorized user on a credit card of your own. (This assumes you use your own credit card responsibly; if not, don’t burden your student with it!) If you go this route, the credit card company will provide a card for the authorized user; it’s up to you whether you give it to your student or not. Make sure that the card issuer will report the card usage to your student’s credit record as well so that they are actually building credit. You can confirm if this is happening by pulling your student’s credit report from annualcreditreport.com a few months after they’ve been added.
  • Co-sign a credit card for your student. Remember that when you co-sign, you are fully liable for the credit card bill should they not pay it. In this case, you’re best off having them get a card with a low credit limit to minimize expenditures and risk. Then, make sure they use the card for purchases on a regular basis and pay the bill promptly and in full. As the co-signer, you should have online access to the credit card so that you can verify that your student is paying the bill. You can also link their bank account to the card so that you can pull in the payment if they’re not doing so. That may fall under the “helicopter” heading but remember that your goal is for them to establish good credit and that may require some assistance on your part.

We chose the first route—adding them to one of our credit cards as authorized users—mainly because with both kids attending college out of state, we wanted them to have enough credit to book their own flights or handle an emergency if needed (and of course we wanted the airline miles!). They also each have an online savings account from which I can draw money to cover their charges. So far no one has taken advantage of having mom and dad’s credit card. My primary worry is that it’s probably tucked into a desk drawer where they don’t ever see it, so if it were stolen, we’d probably only find out once someone charged a few thousand dollars.

3 thoughts on “Establishing Credit for Your Student

  1. We put our oldest on a small car loan for a younger child in his sophomore year. In his last year when he moved in with two working friends , he was the only one with acceptable credit to sign the lease and he only worked part time. This is an important step in getting the students ready to move out on their own . Thanks Ann for bringing this to our attention

    1. A friend of mine who’s also an advisor has a great description of credit scores for high school students: “It’s like an SAT score for adults.”

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