Student credit cards 101
According to a recent post by Kristen Kuchar on the topic of students’ common money mistakes, she reported that the average college student can accumulate as high as $3,000 in credit card debt. Of course, this doesn’t mean student credit cards are bad or should be avoided. In fact, the potential is often justified by the opportunities made possible by establishing a positive credit history.
To better understand how these cards work for students, we must first start at the beginning. The Credit Card Act of 2009 stipulates that a student of 18-21 years of age may qualify for a credit card if one of the two conditions are met:
- A parent, guardian, spouse, or another adult is willing to co-sign
- You submit proof of income and financial history proving a full-time income (or even a part-time income that’s sufficient enough to pay the balance each month).
When you need a parent to co-sign
When you’re a student starting out with a credit card, you might need a parent to co-sign. This is not an uncommon situation as most first-timers usually won’t have a credit history or enough income to qualify for a card on their own.
Co-signing risks for parents
There may be several benefits to having a parent co-sign for a student credit card, but there are also risks for both the parent and the student.
- Parents who co-sign aren’t just helping their children qualify for a credit card. Co-signing also means that both parties will be held mutually responsible for all debts incurred.
- Certain credit factors, such as high utilization, can negatively impact a parent’s credit score.
- Shared accounts that go into default can negatively impact your credit score the same as accounts that are held privately. Both parties will also be pursued by collections.
Alternatives to co-signing
If parents would rather not co-sign for a student’s credit card application, there is the alternative of adding an adult child as an authorized user to an existing card account. This can help parents give specific financial advice to their child and, being an authorized user adds to a student’s credit history.
What is the best credit card for students?
The best credit card for students is the one that fits your financial goals. For instance, if your goal is to use your card instead of cash to earn rewards, then look at the Discover it® for Students. Are you planning for forgo the dining plan and eat out often? Then you might want to consider the Discover it® chrome for Students. Or, if you have poor or no credit history yet and you’re just starting out, think about the Discover it® Secured Card - No Annual Fee.
The key is to find a card that matches your goals, interest, and spending habits, apply, and then use it responsibly to consider building credit. This means only charging what you can afford to pay and then making payments in full and on time each month.
How do you get a credit card for the first time?
Getting a credit card for the first time will depend on your credit profile. If you have some good credit (perhaps your parents listed you as an authorized user on their credit card), then you may be able to apply for student-specific credit cards on your own. If you have no credit history or bad credit, then you may need a co-signer (as mentioned above), or you may consider a secured card. A secured credit card requires a cash deposit; however, in many cases, you can receive a deposit refund after several months if you keep your account in good standing.
What do you look for in a good credit card?
The best credit card for you will depend on how you plan on using it; however, with any credit card — whether it’s the best balance transfer credit cards or the best student credit cards — you’ll want to look at a few key details:
- Low (or $0) Annual Fee: This is a once-a-year fee you pay in order to use your card and its benefits. The best credit cards have no or low annual fees; however, as a student building credit, you may need to get a card with an annual fee.
- Annual Percentage Rate (APR): This is the rate you’ll be charged for “borrowing” money via a credit card, on a yearly basis. APR differs from interest rate, which is monthly. Ideally, you’ll have a low APR.
- Credit Limit: This is your line of credit or the amount you can charge each month. Knowing your credit limit is important to keeping your credit utilization low (around 30% or less). This means if you have a $300 credit limit, you shouldn’t have more than a $100 balance at any given time.
- Introductory Offers: Depending on the card, they may offer introductory 0% APR or $0 balance transfer fees to entice you to sign up.
- Rewards: These are points, miles, or cash back you earn as you make purchases. The rate at which you earn depends on the card.
- Credit Score Tracking: Although not an essential for all credit card users, students trying to build credit will find this feature particularly useful.
No matter which card you choose, the most important thing to keep an eye on is your statement balance. You should never charge more than you can pay off. Paying your balance off in full and on time each month is crucial to build positive credit.
How do credit cards work?
A credit card actually provides a short-term loan. A less-pleasant word for a loan is debt. When you purchase lunch at a restaurant with a credit card, the credit card company pays the restaurant right away on your behalf, then gives you roughly a month to pay them back. You are legally bound to pay back that loan.
This is where the situation gets tricky. If you fail to pay your credit card balance in full each month, your card issuer has the right to charge an incredible amount of interest on the balance of money you owe. In many cases, and depending on your interest rate, that means that your $12 lunch at Applebee’s could end up costing you $15, $20, or even $30 over time. However, if a credit card is used properly, it can be an interest-free loan. You simply need to learn to pay your balance in full when you receive your credit card statement each month, or before. Even better, through rewards accumulation, you can actually be “paid” to use this loan.
How students get into credit card trouble
Sometimes, students make the mistake of getting in over their heads with high interest rates on outstanding balances. In order to help student avoid these and other common mistakes, we’ve put together some examples to learn from:
Mistake #1: Overspending
It is easy to forget you are going into debt when you first start using credit. You simply swipe the card and go on your merry way. Unfortunately, the small purchases you don’t remember making will add up over the weeks and months. If you don’t keep track of your purchases in real-time, you may spend far more than you planned. When this happens, you can easily get whacked with an over-the-limit fee or spiral into credit card debt that becomes unmanageable.
Mistake #2: Spending just to earn more rewards
Many credit cards let you earn rewards points that can be redeemed for merchandise, cash back, or travel. It may be tempting to maximize this feature, but you should only do so with caution. The fact is, spending to earn rewards is never beneficial because your unnecessary spending often costs more than the rewards you get back.
Mistake #3: Making only minimum payments
When you carry a credit card balance into the next month, your credit card issuer will ask you to make a minimum payment. This minimum payment is usually only a small fraction of the amount you owe, which can be tempting if you are tight on cash. However, it is important to remember that the balance you carry over will accrue interest and ultimately cost you more money over time.
Mistake #4: Not paying your bill on time
Since your payment history is used to decide 30% of your credit score, late credit card payments are a huge step in the wrong direction. In addition to negatively impacting your score, you will also be charged a late fee that is generally somewhere between $30 and $40.
Student budget calculator
The importance of managing your finances cannot be stressed enough during the college years. It really is a brand new world and, for many, this is the first time keeping track of the money without mom and dad. That’s why we put together this interactive budget calculator to help students who are interested in managing and analyzing their finances. Use this calculator to gain a better understanding of where the money is going so you can prepare your expenses for the coming school year.
How can students use a credit card the right way?
If you want to learn how to truly use credit responsibly, it is best to start out slow and easy. You don’t need to rush into using credit exclusively, and would probably be better off making a few small transactions each month until you feel comfortable. Here are a few more tips that might make the transition smoother:
Start small with one card and a low limit
Since the most common credit card mistake that plagues students is overspending, it might be wise to begin the process with only one card that comes with a relatively low credit limit. For example, a student credit card with a $300 or $500 credit limit offers enough credit to let you get the hang of it without offering you so much credit that you risk going far into debt.
Make small everyday purchases, not extra purchases to get rewards
A common mistake many students make with their first credit card is to deviate from their normal spending habits. Some people get the idea that they need to make exorbitant purchases with their credit card in order to “jumpstart” a decent credit score. Overall, you should never purchase something with a credit card you aren’t capable of paying off within the month. Instead, get used to having that card and make everyday purchases. Accrue some points and/or cash back reward until you are comfortable with your understanding of how your card works.
Understand your spending by analyzing the statement
After using your new student card for your first month, you can use the information you gain to understand your spending better. Unlike when you use cash, using credit creates a paper trail of every transaction you make. This paper trail, and the online budgeting tools the best student credit cards usually offer, make it easier to analyze your real spending and look for ways to improve it.
Pay off your balance each month
With most credit cards, you’ll be required to pay off a minimum amount of your outstanding balance. We recommend getting into the habit of paying off your balance in its entirety, every month. By doing this, you avoid getting hit with any high interest rates. It also looks good on paper as far as your credit score is concerned.
Research the best credit cards for students
There are so many choices for students when it comes to credit cards. Not only that, but each card also offers its own set of perks and caveats. How are you supposed to know which student credit card is right for you? That’s where our student credit cards directory can really help sum it all up.
Rewards Tier Level
No APR for 6+ Months
Good Ongoing Rewards
No Foreign Transaction Fee