Editorial Policy

Student cards offer first step into credit world

Dawn Papandrea

July 16, 2015

It’s the old Catch-22 — you need a credit card to begin building a credit history, but you need a credit history to qualify for a credit card.

For college students, however, credit issuers have created a great option specifically designed to help them get started in the world of credit despite their newbie status.

Sort of like a plastic prerequisite course, student cards often provide campus dwellers with their first access to credit. In doing so, young adults can learn credit responsibility and eventually graduate to grownup credit accounts once they finish their studies and begin earning solid income.

Why is building credit important? In a nutshell, the three major credit bureaus collect your credit card and other payment data from lenders. That data is used to create your credit scores, which are used to assess your creditworthiness for anything from applying for cellphone service to renting your first apartment.

Here’s a look at student cards to help gauge if they’re right for you (or your young adult in college).

What exactly differentiates student cards?

“The main difference between student and regular cards is that there is an understanding that the student won’t have much of an earning income at all, and their credit score will be none or limited,” says Matthew Coan, owner of Casavvy.com, a credit and banking comparison site. Someone with a nonexistent credit history and little income would normally not qualify for a traditional credit card, but being a student can be a ticket in.

“You’re not guaranteed approval just because you’re a student, but you are likely to qualify,” says Coan.

Lucky for you, there are many student cards from which to choose. According to Matthew Goldman, CEO and co-founder of the credit card optimizer software company Wallaby Financial, his site currently catalogues 78 student cards, 50 of which are actively issued. “Student cards tend to come in one of two forms. One is a card that’s just like its regular version, only with a lower credit limit. The other is specifically designed to encourage good credit behaviors, offering rewards and benefits relevant to a student,” says Goldman.

For instance, he says many of the major banks offer a student version of their major credit card products. Discover it for Students and the BankAmericard Cash Rewards For Students are two examples. “They have a slightly different fee structure and credit limits because they are designed with different credit profiles in mind,” Goldman explains.

There are also student cards issued by credit unions or local institutions near colleges. However, Goldman points out that credit unions tend to be positively structured to help students use credit wisely.

Should you get one?

“It’s almost a no-brainer to get a student credit card,” says Coan. “The process of getting a credit card or auto loan right after you graduate with little to no credit is a huge hassle that can be solved by getting a student card while you’re in school.”

He recommends using the card to get a tank or two of gas or pay for a few books. “Use it for something you know you have the money to pay for, and pay the balance in full,” says Coan. “That’s the easiest way to establish and create a good credit score for yourself.”

Goldman agrees that credit cards in general are great tools for building credit when used properly. “Student cards are good at the very beginning of adult life. They do have smaller limits, which limits the amount of trouble you can get into, but there are also a lot fewer negative fees than other cards,” he says.

Extra credit

It was a pretty common scenario for students to sign up for their first credit card in exchange for a free hat in front of their college bookstore before the Credit CARD Act of 2009 set some ground rules to protect students, says Goldman. “Banks are careful now to not be taking advantage of any students, and there are a lot of limitations on the marketing practices that banks can engage in,” he says.

In fact, many student card providers take the opposite approach by serving as a personal finance educator of sorts. “There are a handful of cards out there that offer incentives for using your card responsibly,” says Coan. For instance, you might get bonus reward points if you pay your bill on time for a year, he says. Other student cards (and more regular ones these days, too) offer you a free FICO score on your monthly statement. FICO is the dominant scoring model.

The path to credit graduation

Opening a student card in junior or senior year of college will hopefully give you a couple of years to show you can maintain a strong credit GPA, thus making it easier to upgrade to a more mainstream card once you have your diploma in hand. You’ll also need to find a job to show that all-important income, of course, but your credit score will already be on the rise due to your strong student card conduct record, because you’ve been paying on time and in full each month. Just to be sure, you’ll want to check your FICO score for about $20 at MyFICO.com. While you’re at it, check your credit reports annually for free at AnnualCreditReport.com to make sure there are no errors.

So when can you graduate to a regular card? “For most major issuers, it’s as simple as calling them and talking to them,” says Goldman about upgrading. “Wait until you graduate and have an income, and explain that you’d like to have a regular card with a bigger credit limit. They’ll usually approve it if you have a history of paying on time, and you’re not using a lot of your available credit limit,” he adds.

Coan agrees, adding that you can improve your odds of getting your request approved if you stay within the same brand of cards. “Call, and if you qualify for a more rewarding card, I highly recommend going for it,” he says.

For anyone who’s in school and is ready to give credit cards a try, student cards offer just the right amount of learning curve to ease you in.