My 20-year-old brother recently became a “qualified user” of our dad’s credit card, which allows him to receive a copy of my dad’s credit card (with his name on it) and share the account.
Unable to independently open and obtain his own card due to his age and lack of income (thanks to the CARD Act), he and my parents decided this would be the smartest way for him to establish credit as a young adult.
Per their father-son agreement, my brother will be limited to making only “necessary purchases” like books and student activity fees. Assuming all goes well and the bill gets paid on time each month, my brother will benefit by establishing credit at an early age, as the activity on the card will get reported to the credit reporting agencies separately under both my dad’s and brother’s name.
For my brother and all other students seeking to establish credit in college—either by teaming up with Mom & Dad or getting their own account—note that it’s important to manage that credit responsibly. Simply having a credit card account is not enough to earn high marks on your credit report. There won’t necessarily be credit-wise directions with your card, so here is some advice from me and Independent Community Bankers of America (ICBA).
Avoid Cash Advances
This is a pricey trap I fell into during the earlier part of my credit history. At first, I had no idea I could actually use my credit card like an ATM card. But then I learned. And, man, did I get cash-advance crazy. You’re telling me I can access cash without having to actually earn it? My 20-year-old self couldn’t help herself. According to a credit card survey by the non-profit group Consumer Action released earlier this year, nearly all cards (90%) have cash advance charges, ranging from 2% to 5%, which typically apply immediately. The average cash advance fee, meantime, is 3.81%. Fail to pay it back on time and you have to pay an APR, which is typically higher than the APR on normal purchases. The interest begins to accrue immediately.
Going to the Mall? Leave the Card at Home
Shopping for clothes with your credit card is not the wisest way to practice good credit behavior, unless you are able to pay off the balance in its entirety when the bill comes due. But let’s face it—our judgment is not the best whilst shopping. We think we “need” something when it’s merely a whimsical want and carrying a credit card may give us a false sense of what we can truly afford.
Don’t Be Allured By Your Limit
The limit on your first credit card may not be too high, but over time, with good behavior your card company may extend your credit line. If this happens, don’t assume you have more liberty to spend (even though technically you do). When your card’s limit rises, it doesn’t necessarily mean you have an enhanced ability to pay all that money back. The card company is not rewarding you for that raise you received at work. An increased limit is simply the card company’s way of saying “you’ve been responsible thus far with the card. We like you. Here’s more available credit.” Just see it as a nice cushion that will help lower your debt-to-credit utilization ratio (a key variable used to crunch your credit score), which measure your outstanding credit card balances divided by your credit card limits. The less you use of your available credit, the better.
Pay Bills Online and On Time
Pay on time, every time. The ICBA suggests that if you can’t afford the entire amount, pay far more than the minimum payment owed—for example, 150 percent of the minimum—to pay off the balance faster and save on finance charges. Payment history is 35% of your FICO credit score, so following this tip will definitely help nourish your score.
Guard Your Card
In college you may be asked to hand over your credit card information from time to time. It’s important to keep your card information protected, always. The ICBA says to never give out your credit card number, card verification number or expiration date over the phone, unless you initiated the call and know who you’re dealing with. And while you trust and love your friends and roommates, never let anyone borrow your card. Identity theft is unfortunately too common on college campuses and culprits are sometimes those you least expect—friends, family and roommates.
Image: Steven S., via Flickr.com