Credit card stoozing, a.k.a. credit card arbitrage, is a simple process through which you can actually make money from credit cards and high interest bank accounts. Yep, you heard that right – with a bit of effort and some careful planning you can make money from your credit card. Here’s how!
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It’s important to establish a solid payment history and credit score while you’re still a student. At that age, credit card issuers realize that you haven’t had enough time to develop your payment history, and are willing to cut you some slack. You’ll still need a co-signer if you don’t have an income, but the credit history you build on a joint credit card will still build your own score.
Many student credit cards require that you be, well, a student, and credit card companies don’t look kindly on a young adult fresh out of college who has no history to speak of. Therefore, it’s vital that you prepare yourself for life outside of college by establishing credit early.
1. Get a credit card, if you can handle it
If you can commit to being responsible, you can begin to build your credit history with a student credit card. This helps many aspects of your credit score: it establishes a payment history, which makes up the bulk of your score; it lengthens the average age of your accounts; and it increases your debt utilization ratio, which is the amount of debt you have compared to your credit limit. If you don’t have an income, you’re required to have someone co-sign for the card. Even if you have established credit, you can get better terms if you apply with someone who has a better score. Lenders are required to consider only the highest credit score of the people co-signing a loan.
2. Don’t apply for too many loans at once
Part of your credit score depends on the number of recent credit inquiries – how many lenders have asked about your history. If you apply for too many credit cards at once, you’ll look suspicious. Fair Isaac (the company that issues your score) makes allowances for “shopping behavior” when it comes to mortages and auto loans: they expect you to contact a number of lenders in a short period, so they count all inquiries for those loans in a 14 or 45-day period as only one inquiry.
However, they don’t make exemptions for credit cards or private student loans. Each inquiry, according to Fair Isaac, lowers your credit score about 5 points. This may not seem like much, but people with 6 or more recent inquiries are at a high risk of default, and so are more likely to face high interest rates or be denied outright. The best way to avoid this is to minimize your student loan and credit card applications, and to do all of your applications for auto loans in a short period of time. FinAid, the government financial aid website, recommends that you limit your private loan applications to just one bank, one non-bank lender and nonprofit state loan agencies.
3. Don’t close your accounts
If you already have a credit card and want to apply for another, don’t close your account on the first credit card even if you don’t plan to use it. A major factor in your credit score is the length of time your accounts have been open, as well as the number of accounts with no late payments. Having an extra credit card also helps your debt utilization ratio, since you can add that card’s limit to your total available credit. Make sure that the card has no annual fee to prevent bleeding money while you’re not paying attention.
4. Have the right kind of debt
Your debt utilization ratio, or the amount of debt you have compared to the maximum amount you can borrow, factors significantly into your credit score. If you max out your credit cards, you’re brushing up against the ceiling, and creditors may be unwilling to trust you with even more credit. Try to minimize your revolving credit card debt. Installment loans (such as student or auto loans) are a better kind of debt to have, since they’re establishing your payment history.
5. If you’re turned down, ask why
As part of the Dodd-Frank financial reform bill, if you’re turned down for a loan or are offered worse terms than usual, you’re entitled to know your credit score and the factors that negatively affected it. This is intended to prevent cases of mistaken identities, bring transparency to the mysterious FICO score, and prevent lenders from arbitrarily lumping applicants into the “bad credit” and charging high interest rates. If you’re turned down, you should understand why. You may be able to catch a slip-up, or you might get some valuable information on ways to raise your credit score.
Tim Chen is the CEO of NerdWallet, a credit card company dedicated to bringing you the best credit cards out there.