5 Biggest College Credit Card Myths

Last Updated May 18, 2010 5:59 PM EDT

On a recent campus visit to Penn State University, I volunteered to help solve students' financial blunders for the day. As it turned out, college students are deeply fascinated with credit cards. How do I pick a credit card? Do I need a credit card? How do I establish credit? Is it safe to open up a store credit card?
These were all important questions to ask at this stage in life. After all, the earlier you establish credit, the better for your credit history. The length of your credit history on credit accounts makes up 15% of your credit score.

I know if these students were scratching their heads over credit cards, many more must be as well. To help, here's my roundup of the five biggest campus credit myths - busted.

1. Credit Cards Are the Only Way to Establish Credit
Not exactly. As Gerri Detweiler of Credit.com tells me, there's more to it than you may think. "To establish credit, you have to establish credit accounts that are reported to the major credit reporting agencies. These can include student loans, auto loans, some personal loans and credit cards." The major credit reporting agencies are Equifax, TransUnion and Experian.

That said, it is extremely helpful to have a major credit card in your name and use it responsibly. (Read: pay it off in full every month.) 
If you can't qualify for a traditional credit card at the moment, Detweiler suggests shopping for a secured card at your local bank, which requires you to put up a security deposit with the issuer. Note: These cards should not be confused with prepaid (debit) cards, she says, where you load money onto the account and spend it down. "Prepaid or debit cards do not help you build a credit history with the major credit reporting agencies," says Detweiler.

2. You Don't Need Mom and Dad's Permission
This used to be true - but the new CARD Act (the Credit Card Accountability Responsibility and Disclosure Act of 2009 to be exact) now forbids credit card companies and banks to extend a credit card account to anyone under the age of 21, unless he or she has an adult co-signer with established credit and income. In that case, you may need to get a parent to co-sign with you and depending on your situation that may be a long shot.

3. A Store Credit Card is a Fab Deal
Sure, you'll get 20 percent off your first purchase, plus special sale alerts, by opening up that store credit card. But what the store doesn't highlight right away is that these cards are laced with steep late payment fees and carry larger-than-average interest rates. What's more, these cards don't usually extend substantial lines of credit - maybe $500 or $1,000 to start. Without a substantial line of credit in the thousands of dollars, you risk maxing the card out before you can say 100 percent cashmere.

That won't do much for your credit score, since one third of your score is based on what's called your debt-to-credit ratio. In plain-speak, that's how much you're charging up relative to how much available credit is on your card. You want to keep that ratio as small as possible - no more than 10 to 30 percent at a given time. But with a card that has, say, $500 of credit on it, you can easily surpass 30 percent after a few store purchases (especially if they're cashmere).

4. I Need My Own Card to Establish Credit
You may be able to piggyback on a parent's card usage by being added to a parent's account as a joint account holder. "Typically, the account history will then also be reported on the young adult's credit history," Detweiler says. The downside? "You will be 100 percent responsible for any charges in the account, just like the primary account holder is," she says. Think twice - or maybe three times - before doing this, especially if your parent is in a lot of debt, in which case he or she may default and the debt burden becomes yours.

5. Big Banks Offer the Best Credit Cards
While large banks may boast great deals and rates, as a young adult opening up a credit card for the first time, you may want to scour the offers from your local credit union first. Credit unions generally offer the lowest annual percentage rates (APRs) on credit cards. They're also known for above-average customer service. If you want one-on-one help where they will remember you by name, a credit union is often the place to go.

Start by visiting your campus credit union (if there is one) and ask about their credit card offers. You can also search for credit unions in your area at www.findacreditunion.com and www.creditunion.coop. For what it's worth, I've been a happy banking client with the Digital Federal Credit Union in Massachusetts (where I was raised) since I was 19 years old. The Visa card they issued me carries a small 9 percent interest rate - far below the national average of about 14%. And when I call, someone picks up right away. A real live human!

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    Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv and on Twitter at @farnoosh.