As a brand new college freshman when you first set foot on campus you will be bombarded with credit card offers. You will find booths outside the student union ready to sign you up, offers for low or no interest cards in your school mailbox, and flyers advertising credit card perks tucked into your school book purchases.
Student credit cards are available from almost every major banking institution. These specially designed cards are targeted specifically to students enrolled full time in higher education. Getting a credit card comes with many risks, so use your card wisely. The average student leaves school with $3,000 in credit card debt.
The Credit Card Act of 2009 set up some regulations around issuing credit cards to those 18-21 years old. You either need a parent or guardian to co-sign or have proof of full time income (sometimes part time income that is enough to cover the monthly payments is enough). And further the Credit Card Accountability, Responsibility and Disclosure Act has a requirement whereby students must get written permission from a parent for any credit line increase until they turn twenty-one years old.
But first a quick primer on how credit cards work. Credit cards are a short term loan, which is also another way to say debt. When you use your credit card at the university bookstore, the cardholder pays the bookstore for you and then gives you a set period of time to pay them back. Usually it is a month. If you do not pay it back in full, then you are charged interest on the balance carried to the next month. However, if you pay it off each month it is an interest free loan!
While it is easy to get in over your head with a credit card, these cards do have many advantages. These include:
- Rewards: Do you like to travel? Or prefer cash back? Student credit cards usually come with rewards that are tailored directly to your interests.
- Establish credit: If you have never had a credit card before a student credit card is a great first step to establishing credit. These cards are used to students who have little or no credit already so you are more likely to get one. Using your card responsibly will help raise your credit score and will make buying a car or house easier and cheaper later on.
- Low credit limits: With a low credit limit you are less likely to get yourself into trouble overspending. Cards will often start at $500 or $750 which is easier to repay if you max it out versus $3000. Many cards will automatically increase your limit after a predetermined number of on time payments.
- Education: Learning how to manage credit is an important life step. Many cards targeted towards students include budgeting tools or spending analysis. Using these tools will help you see how you spend money and help you make a responsible plan for managing your credit.
- Some student credit cards, like Discover’s Student Card, will offer up to twenty dollars in cash back for high GPAs.
What to look for in a credit card:
- No annual fee: Many card charge an annual fee but plenty abound that do not. For your first student credit card, make sure yours is fee free.
- Low interest rate. Again rates vary from card to card so shop around for a card with a low interest rate. Taking the time to shop now will save you huge fees later.
- Rewards you will use. Pay close attention to the rewards the card is offering. Often cash back rewards are better and earned faster than travel rewards. Plus cash you can spend anywhere.
Yes, credit cards inherently have many risks but as is the case with many risky things there are also quite a few positives. Establishing credit, learning to manage your credit, and having a readily available credit limit are all perks that make it worth the risk. So apply for your student card or apply your college age child now before it is too late. The power is now!
Eric Lawrence Frazier, MBA
President and CEO