Student Credit Cards
The Best Cards and How to Handle Them Responsibly
If you’re thinking about applying for a student credit card, make sure you’re also ready to take on the responsibility that comes with having one. There is a lot to learn about credit cards, but don’t fret – we can help you understand. In this article, we’ll show you:
- The best ways to stay out of debt
- Explain how interest and other bank fees work
- Show you the best cards for students
- Steps to building good credit
We have also included guidelines and other information for parents and co-signers, who may be involved in helping open the student account. And if you aren’t familiar with credit card jargon, check out our handy credit card glossary for reference as you read.
Stay Out of Debt with Your Student Card
Before signing up for a credit card, there’s one important rule to follow: don’t drown yourself in debt. It’s crucial that you take a moment to learn at least the basics of how credit cards work, along with how they can both benefit and hurt you financially. Getting your first student credit card is a great way to build your credit history, which can, in turn, help you out later in life when you must make even bigger financial decisions.
Stay within your limits
The median credit card balance for college students in 2019 is $500, up from $400 in 2016, and the numbers are even higher for students attending private colleges. If roughly 80 percent of student credit cards have a limit of $1,000 or less, that means that the average student is way over the healthy ratio for debt to available credit.
Understand Interest and Other Bank Fees
The average interest rate on credit cards for students is currently about 19.5 percent, which is higher than the national average of 15.09 percent across all credit card accounts. The reason the rate is higher for college students is because these borrowers usually have a limited – or nonexistent – credit history.
Think of it as training wheels. Most people don’t fully understand how credit or credit cards work until they experience these things first hand. It takes time to learn the ins and outs and even more time to build your own credit history. You’ll need help with this along the way. As such, card issuers typically apply lower possible credit limits to student cards until you can demonstrate over time that you will use the card responsibly and make full payments on a regular basis. These rates and terms can vary slightly depending on whether you are the sole applicant, or if you have a cosigner, which would typically be a parent.
The Credit CARD Act of 2009 sets limits on when a credit card company can increase rates on a brand new card, and also limits rate increases on existing card balances. Here are the times when a credit card issuer can raise your interest rates:
- Once the introductory promotional period ends, which is a minimum of six months by law.
- The rate will increase or decrease if the credit card owner has agreed to a variable rate.
- If a monthly payment is more than 60 days late.
- If the card user fails to make agreed-upon payments to a plan to pay off excessive debt.
- If the cardmember serves in the military and is no longer on active duty. For stated by federal law, interest rates are capped at 6% for active duty service members, but normally rises when active duty ends.
We recommend looking for a student credit card that offers zero-interest introductory rate. This is beneficial for new borrowers, but such a nice reward may only be possible if you use a cosigner – that is, someone like a parent or guardian who already has healthy, established credit who can help take on the responsibility of managing another credit card.
Your rights when rates increase
An important thing to know about having a credit card is that sometimes rates can increase. And as we learned in the previous section, it can change for a variety of reasons. The issuer must give you advance notice of any intended rate changes, whether they increase or decrease, at least 45 days before the change goes into effect. This also goes for any intended changes to the terms attached to the card.
You may not know that you, as the cardholder, have the right to cancel your account or opt out of the agreement at this point. Also, if you get back on track making payments and get caught up on any outstanding balance you may have, the card issuer may eventually lower your rates again. The issuer is required by law to review accounts every six months.
Many student credit cards allow you to select an option called an over-limit fee when you first sign up. This feature allows you to exceed the limit of your credit card, for an additional fee that will be added to the account. If you decline to sign up for this feature, all purchases that exceed the available balance on your card will be denied.
You should only sign up for the over-limit feature if you know you are responsible enough to handle it, meaning that you wouldn’t regularly be using it and that you would be making monthly payments on time to decrease your owed balance. If you know you’ll be tempted to take advantage of the feature, you may want to skip it altogether, for the benefit of your future credit health.
As set forth by the law, credit card companies can only charge one over-limit fee within a single billing cycle. The Credit CARD Act states that any applicable over-limit fees must be “reasonable,” but that the fee can still be determined by the issuing company. It’s worth noting that issuers allow you to opt-out of this feature at any time, should you feel it’s not working out for you.
The High Cost of an Impulse Buy
Young workers likely understand the feeling of money burning a hole in your pocket, and that feeling can intensify with a brand new credit card in hand. The notion that you can buy something now and pay for it later may be too tempting for some, leading to an impulse buy.
For example, you see a good deal on an Apple MacBook laptop – let’s say 30 percent off of the original purchase price of $1,599, so a sale price of $1,120. You can’t resist the deal, so you put it on your credit card right away, which has a great interest rate of 13.14 percent. Your monthly payment will be $95.20. But after several monthly payments, you’ll end up paying $1,273 because of $153 in interest. Because you couldn’t pay off the balance the first month, and the interested continued to collect.
And should you be unable to make payments for a few months – or you forget or choose not to make a payment – you’ll end up paying even more in interest fees in the long run. That is money you could have better spent on something more beneficial to you, like rent, food, or school supplies.
In addition, large impulse buys can put you over the 30 percent limit. In order to maintain good credit health, it is recommended that you don’t spend more than 30 percent of your credit limit, as it can negatively impact your credit’s health.
Guidelines for Parents
It’s safe to assume that your college-aged kid will be excited to have their own credit card. However, it’s up to you to discuss with them the benefits and the repercussions that come along with having one. Having a credit card is an opportunity to help them grow, both emotionally and financially, and whether you’ve chosen to co-sign a credit card with them or not, this is a great opportunity to teach them some key financial lessons:
Each credit purchase is a responsibility
Help your teenager realize that each purchase they make has a consequence and must be accounted for – literally. You can walk them through setting up a monthly budget of expected income and expenses and even help them decide how to pay for each purchase, with what card or account.
The best way to prevent your student from getting too comfortable with the credit card is to set it up only for small purchases. Card issuers typically reward frequent small purchases and the ability to pay it off each month. This plan reduces the chances of the card staying maxed out and racking up accruing interest fees or late fees.
If your child wants to use the card to make a larger purchase, help them understand what a big deal that is and what it will entail. Map out how long it will take them to pay off the purchase, and that interest will play into those payments. Also help them understand that a single large purchase on their card means they will have fewer funds for other upcoming purchases until they get their balance paid off.
Checking your account profile frequently is important
Have your teen log in regularly to their credit card lender’s website online or via the mobile app. You can encourage them to do this once a week, or monthly — whenever they pay the rest of their bills. Help them understand how to read statements, find their owed balance, and make an online payment properly. This practice helps them stay on top of their balance and develop good financial habits for the future.
Credit history starts with your first card
As you likely know, a student credit card gives young cardholders the chance to develop their own credit history. Starting this process as early as freshman year of college not only teaches financial responsibility, but also makes it easier for students to pass credit checks when applying for off-campus housing, buying a car, and applying for other loans down the road. Help your child understand that being responsible now will help them succeed financially as life goes on.
Co-signers have a stake in credit decision-making
If you are a parent who will be co-signing your teenager’s student credit card, be sure they understand what that means for you before doing so. Let them know that it is you who is ultimately responsible for payments, that it is your credit that will be affected by missed payments, and that it is you who is taking on additional debt to give them this opportunity, and that you expect them to use the card responsibly.
You can decide how to manage this, and communication is key. You can ask your student to let you know every time they make a purchase or payment on the card, or even ask view the statement each month.
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