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Archive for Tuesday, September 2, 2003

Students don’t need credit cards to build good credit

September 2, 2003

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When you give advice, people will disagree with you. So I wasn't surprised when a number of readers thought I was wrong to say that college students don't need credit cards.

"Of my friends in college who did not have credit cards, they ended up having a really hard time getting one once they graduated," one reader wrote.

"In order to rent a motel room, you have to have a credit card," one father e-mailed me. "My kid is at Purdue in Indiana. With the ever-present potential for breakdowns, on-the-road repairs, and such, there may be a need for a motel room."

Another woman argued -- as many people did -- that student drivers need a credit card. "My daughter gave her son a separate credit card when he was a junior in high school. This decision was made for safety and convenience. He was driving car pool to high school and she didn't want him running out of gas."

Building credit

Let me address the first reader's point. Can college students get a credit card after they graduate?

They can. Will it be easy? Maybe not for all. But what's the rush?

Yes, I know they need to hurry to build a good credit history.

"A major success of the credit card industry's marketing campaign is in persuading students that they can only build a good credit history with credit cards," said Robert D. Manning, who has studied student credit card debt and is author of "Credit Card Nation: The Consequences of America's Addiction to Credit."

Manning said college students can establish good credit by signing up for phone, utility and retail accounts in their names (not their parents').

And it really doesn't take that long to establish good credit, according to Jan Davis, president of TrueLink, which provides credit reports and other credit-based products to consumers.

How long does it take?

"About six months," said Davis, who also said new graduates without a credit history should get a retail charge card.

"Since retailers want to sell merchandise, they have a bit more lenient credit requirements," Davis said.

She recommends that you open an account with a low credit limit. Use the account as agreed (just opening it doesn't do you any good). Don't charge to the limit. In fact, just charge about 35 percent of the maximum available credit line. For example, if your credit limit is $1,000, don't charge more than $350.

Most important, you have to pay the bill on time every month.

Within six months the consumer could have a credit score of 700, Davis said. Since credit scores range from 300 to 850, a score of 700 is very good.

In addition, if you're having trouble getting a regular credit card, try applying for a "secure credit card."

A secured card is backed by money you have in a savings account. In many cases the minimum required deposit is as little as $200. This means that you may only be able to charge a total of $200. But frankly, that's all you need since the goal is to prove you can responsibly handle a credit card account.

For a list of secured credit card issuers go to www.bankrate.com. But watch out for fees and shop for the best interest rate since the rate on these types of cards can be high. Before you apply, ask what the total cost will be to carry the card.

Hotels, gas no excuse

And what about the notion that you can't rent a room without a credit card?

Some hotel chains (Motel 6 or Red Roof Inn, for example) will allow guests to stay without having a credit card. Of course, certain rules apply. You may have to pay for the room upfront or your reservation may only be held until 6 p.m. as opposed to being guaranteed for a late arrival if using a credit card.

What about the argument that college or high school students need a credit card for car emergencies?

I've been driving for more than 20 years and I've never "unexpectedly" run out of gas. You know when you need gas. I did run out of gas once but that was because I was trying to get to the station with the cheapest per gallon price.

If you're worried about car breakdowns, get a membership to AAA or a similar roadside assistance plan.

Supportive statistics

A study by Manning called "Credit Cards on Campus" backs me up on this issue.

Not surprisingly:

  • Three out of five students with credit cards maxed them out during their freshman year.
  • Three out of five freshmen with multiple credit cards used bankcards to pay for other revolving credit accounts.
  • Nearly three-fourths of students used their student loans to pay for their credit cards.

I do believe there has been a massive marketing brainwash to get so many people -- who I know must have some common sense -- to believe young people need a credit card. They don't.

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