How Students Can Build Credit in the Card Act Era

Like tuition, college credit-card debt is on the rise. Half of college students have four or more cards, according to a 2009 Sallie Mae survey, and only 17 percent report regularly paying off their balance. As the school year begins, parts of 2009’s credit-card reform bill will finally begin to protect the young from their own spending habits. For starters, students will no longer see card issuers offering giveaways on campus. And for the first time, they won’t be able to sign up for a credit card if they’re younger than 21 unless they can find a cosigner or prove a source of income.

A downside is that the law also makes the already-difficult process of establishing a first line of credit even harder. But young adults eyeing the paperwork for their first apartment or car loan do have options. Instead of cosigning on a new card, parents can add a child as an authorized user to their own existing cards, says Farnoosh Torabi, author of the personal-finance book Psych Yourself Rich. Regular payments are reported to credit bureaus in the child’s name, and parents can set spending limits. Another choice is a secured card, which requires a cash deposit as collateral and essentially allows users to spend against their own money—and no more than that. Secured cards that report to credit bureaus are available at many banks, but credit unions can often provide lower interest rates and no annual fees. With the average undergrad carrying $3,000 in credit-card debt, training wheels seem like a good idea.