Student Credit Cards, Simply Put

‘Cash is king’ is a catchy slogan, but in truth, credit is the key to the kingdom.  Without a credit history, it is impossible to make a major purchase or apply for a home loan. Being a student is a time of great freedom and personal growth. What better time to lay the foundation for a secure financial future?

As a student cash is generally scarce and the idea of credit can be scary. It shouldn’t be. Getting a student credit card and using it responsibly will build a sound credit history to facilitate future dreams.

For a registered, full-time student it has never been easier to get a credit card. Credit regulation offers protection but do the homework before choosing the best credit card on the most favourable terms.

Most students supplement their allowance with a part-time or holiday job, but committed study leaves little time for income generation. Inevitably cash runs out and emergency expenses arise. A credit card is a great form of revolving credit you only pay for if you use.

Banks understand that students haven’t had time to build a credit history and have limited means. But they are eager to get your business, so there is strong competition to offer the best terms.

Many student credit cards have interest-free periods and most offer interest rates lower than those they give non-students.

Beware, though, poorly managed credit can leave a graduate with a debt burden that takes years to pay off and damages their credit score.

Play it safe and get the card from a reputable financial institution.

Below are hints to help guide the process, including the benefits and drawbacks of having a student credit card.

The following three factors should drive the decision-making process when choosing the right credit card to suit individual needs:

Interest rates

Student credit cards offer appealingly low interest rates. Do compare institutions and avoid lenders who try to push credit at high interest. Between 10 and 15 % is an acceptable interest rate for a student credit card.

Annual fees

Many lenders levy an annual charge for giving you credit. Don’t be fooled. It is they who are making money from you, not the other way round.  Choose a card without annual fee.

Interest calculation

The calculation of interest differs between banks. Some charge interest on the account balance that hasn’t been paid off by the end of the lending period. Others calculate it based on the average balance in the account throughout the lending period. A card that only charges interest on the remaining balance is generally cheaper.

Benefits of a credit card

Some lenders offer tempting cash-back inducements if a certain amount of money is spent on the card. This is a nice bonus but can tempt the credit card user to spend more than they can afford, or splash out on impulse purchases. This benefit should be used with restraint.

A student credit card is generally lower interest than any other line of credit, particularly if there is no annual fee payable.

Credit cards are a safer bet than debit cards. Banks tend to be far quicker to resolve credit card than debit card problems. If a debit card is used online, there’s a good chance hackers could drain funds from the account. A credit card, though, allows the owner to refuse authorisation for any payment.

A credit card is a safety net when emergencies arise. Students who don’t have generous families to call on in times of need find this is of great benefit.

Some credit card providers include insurance on travel or purchases. This can be a money-saver.

The downside of owning a credit card

There are two main drawbacks to a student credit card. The user can’t accumulate points or air miles, because of the low interest charged and the relative risk a student represents.  The second drawback is that the student is placed in a situation with the potential to accrue debt. While student credit cards charge comparatively low interest, any credit card has a higher interest fee than a traditional loan.

Contemplating getting a credit card, one must ensure it will be possible to pay it off in a reasonably short time.

When students graduate their student cards expire. Lenders generally won’t extend the same benefits after a client graduates. This might entail applying for a different card with fewer benefits. By this time, though, the benefit of having built up a good credit profile may outweigh any negatives.

Most student credit providers contain interest rates because they know students aren’t earning a regular salary. The downside of using the card regularly, though, is that the limit rapidly gets reached.  Because a credit score is based on the percentage of the credit limit that’s in use it’s possible to end up with a bad credit score. As long as the balance owing is paid before any subsequent credit application, the credit score will be restored to normal.

Choosing & applying for a credit card

No single card works best for every user. Examine the reason for applying to help decide which card to opt for.  The two chief reasons are to access bridging finance or to build credit.

Dedicated study leaves little time for income generation. A credit card helps bridge the gap when cash runs out. This type of borrower should choose the option with the lowest available interest rate and no annual fee. Paying high interest makes it hard to keep a low credit balance and no-one wants to graduate with heavy debt.

Then there are the students who opt for a credit card to start building healthy credit. These applicants pay their account in full every month and avoid carrying a debt balance on the card, so skipping heavy interest payments. These students choose the card that offers the best outside rewards

Whether the card is to be used as bridging finance or to build credit, it’s vital to ensure there is enough money available to pay the balance and/or interest every month, before signing up for the card. The credit-building student typically has a regular source of income, either from family or other financial aid, or a part-time job.

Applying for a student credit card couldn’t be easier and can even be done online in a few minutes, often with instant approval. Have all the required information at hand, including your identity or social security document and proof of registration as a full-time student. Proof of residence may also be required, as well as recent bank statements.

A student under the age of 21 will need proof of independent income to get a credit card. Without it, an adult will be required to co-sign the application. Over 21, proof of income is still required, but the student can include details of any income they have access to (spouse/partner)

A secured credit card is another option. It entails putting down a deposit equal to the credit card limit. If small purchases are made each month and the account is paid in full, this will build a positive credit history.

An authorised user differs from a co-signatory. The card will have the user’s name on it, but be tied to someone else’s account. If used wisely, it reflects positively on the student’s credit history.

In summation, check all the options before making a decision and consider how much will be available each month to pay the debt.  Being a responsible credit card owner takes planning and discipline, but it can bring rich rewards. It is a great learning curve for a healthy financial future and can help build a good credit profile at a comparatively low cost.

Don’t spend more on the card than can comfortably be paid off each month. Don’t get too close to the credit limit, either, and avoid extra fees where possible. The largest portion of a credit score (up to 35%) comes from a history of paying bills on time. Making late payments impacts negatively on that score. If a payment is missed, contact the creditor immediately to make a plan to catch up.

It is risky to stray too close to the credit limit. Most credit organisations prefer that no more than 30% of a cardholder’s available credit is in use at any given time.

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