Picking a first credit card

Erica Sande is not your stereotypical indebted college student. The 21-year-old graduate student at the University of Minnesota doesn’t even have a credit card. Or a student loan or a car loan or any bills in her name. She plans to trade days in school for a job as a school counselor when she graduates next year. Then she hopes to become the proud owner of a new car and a home.

It’s time to get credit. But Erica worries that her “totally clear” credit history will make it difficult to qualify for a card, especially one with cash rewards. Offers rarely grace her mailbox.

So she’s headed online in search for the right card. “It’s gotten to be overwhelming,” says Sande of her quest. She wants a card that’s accepted everywhere, has no fees and offers online bill pay.

“Rewards would be nice,” she says, of programs that range from free airline tickets to points that can support your favorite charity.

So she asked for help.

None of the experts I spoke with thinks she’ll have any trouble qualifying for a credit card. Card companies don’t expect college students to have extensive credit histories or high incomes. Students are given credit because of two words: brand loyalty, says Justin McHenry of credit card comparison site indexcreditcards.com.

“Hopefully, you’re going places,” he says. Banks hope students will take their tried-and-true first credit cards with them.

Lynn Heitman, senior vice president in retail payments at U.S. Bank, says it’s the relationships that matter. “If [a student] has a debit account or a student loan or even a savings account, we know a lot about the individual based on how they handle those.”

Sande first looked to her existing banks, but was surprised to find both of the smaller institutions do not offer credit cards.

U.S. Bank and most credit card issuers offer credit cards designed specifically for students. Heitman says with their student cards, financial education is emphasized, reward programs are tailored to college-age interests and the credit line will typically be less than $1,000. “It’s our effort to help students manage credit responsibly rather than just dumping a bunch of credit on them,” she says.

But beware of high interest rates. McHenry says student cards typically have interest rates that are at least 3 percentage points higher than other cards. Sande could be charged more because her nonexistent credit history is a bigger risk to the bank than that of someone with a proven track record of on-time payments and no defaults.

Sande plans to pay her entire balance at the end of each month, so she hasn’t been focused on rates. McHenry suggests she apply for the lowest-rate card even if she intends never to carry a balance. College students “don’t have a huge safety net,” he says and she may have to pay interest from time to time.

Anyone who may carry a balance should look for the best rate over all else, even rewards. After all, a higher rate would reduce the value of any rewards earned.

Bill Hardekopf of card comparison site lowcards.com advises credit newbies like Sande to stick with a single, low-limit card. “You don’t want to be tempted.” He also says to look for a company that sends e-mail reminders for due dates and warnings when a card is nearly maxed out. “It’s easy to blow by your credit limit, especially if you’re an untrained user.”

Before she applies for a card, Sande should access her free credit report online: It’s at www.annualcreditreport.com.

Then, she should compare student credit cards online, reading the fine print carefully. The devil’s always in the details.

Based on Sande’s wish list, both McHenry and Hardekopf suggest she consider the Citi Dividend Platinum Select Card for students (there’s a version for the rest of us, too). This card offers 5 percent cash back on purchases at supermarkets, gas stations, convenience stores and utilities for six months. After that, those categories earn 2 percent cash back. Other purchases earn 1 percent.

X Kara McGuire writes about personal finance. Write to her at karastartribune.com or at the Star Tribune, 425 Portland Ave., Minneapolis, MN 55488.