6 Things to Know About Student Credit Cards

When it comes to managing your finances as a student, having a credit card can be a useful tool. However, before diving into the world of credit, it’s important to understand what student credit cards are, how they are used, and the implications they may have on your financial journey. In this article, we will walk you through the essentials of student credit cards, including their benefits and drawbacks, credit limits, interest rates, and what happens after you leave school.

What Are Student Credit Cards?

Student credit cards are specifically designed for students who are new to credit. These cards come with unique features and tailored benefits to meet the needs of students. Unlike traditional credit cards, student credit cards often have lower credit limits and more forgiving approval criteria, recognizing the limited credit history of students.

What Are Student Credit Cards Used For?

Student credit cards serve several purposes. First and foremost, they help students establish a credit history, which is crucial for future financial endeavors such as renting an apartment, buying a car, or applying for loans. 

Additionally, student credit cards can be used to cover everyday expenses, emergencies, and build responsible spending habits. Here are some more things to know about student credit cards.

1. They Can Help Build Credit History

By using a student credit card responsibly, you have an opportunity to start building your credit history. Timely payments and responsible credit usage can positively impact your credit score, which will benefit you in the long run.

Credit history refers to a record of your borrowing and repayment activities. It provides financial lenders, landlords, and banks with insights into your financial responsibility and helps them assess the risk associated with lending you money or offering you credit. 

2. They Can Teach Financial Independence 

A student credit card provides a sense of financial independence and teaches you to manage your own expenses within a limited budget. Financial independence lays the foundation for your future financial success. 

By taking control of your finances early on, you can develop a sense of responsibility and self-reliance. The knowledge and skills you acquire during your student years can benefit you as you transition into the workforce and face more complex financial situations.

3. They Offer Rewards and Perks 

Many student credit cards offer rewards and perks tailored to student needs, such as cashback on textbooks, discounts on entertainment, or rewards for good grades. These benefits can help you save money and make your college experience more enjoyable.

4. They Offer Temptation to Overspend

Having a credit card in your wallet may tempt you to overspend beyond your means. It’s important to exercise self-discipline and only charge what you can afford to pay off in full each month.

5. They Have High Interest Rates

Student credit cards often come with higher interest rates compared to other credit cards. If you carry a balance from month to month, the interest charges can quickly add up and become a financial burden.

Let’s consider an example to demonstrate how a high interest rate can increase your credit card balance over time:

Imagine you have a student credit card with a $1,000 balance and an annual interest rate of 18%. For simplicity, let’s assume you make no further purchases on the card and only make minimum payments.

If the minimum payment required by the credit card issuer is 2% of the outstanding balance or $20 (whichever is higher), you would be making a minimum payment of $20 each month.

Month 1:

Starting Balance: $1,000

Interest Charged (18% per year): $15

Minimum Payment: $20

Your payment of $20 is applied towards the interest first, leaving $5 to be deducted from the principal balance.

New Balance: $995

Month 2:

Starting Balance: $995

Interest Charged (18% per year): $14.92

Minimum Payment: $20

Again, your payment of $20 is applied towards the interest, leaving $5.08 to be deducted from the principal balance.

New Balance: $989.92

If you continue making only the minimum payments, you can see that a significant portion of your payments goes towards the interest charges rather than reducing the principal balance. As a result, the balance decreases only minimally each month, and the interest continues to accrue.

6. They Can Lead to Potential Debt

Misusing a student credit card can lead to debt that can be challenging to repay, especially for students with limited income or financial support. 

As a student, you may not have had significant exposure to managing your own finances independently. Without proper financial literacy and experience, it can be easy to underestimate the consequences of overspending or carrying a balance on your credit card. This lack of experience can increase the risk of accumulating debt.

Understanding Credit Limits and Interest Rates

Student credit cards typically have lower credit limits to minimize the risk of accumulating excessive debt. The credit limit is the maximum amount you can charge on your card. It’s essential to stay below your credit limit to maintain a healthy credit utilization ratio, which is the percentage of available credit you are using.

Interest rates on student credit cards can vary, but they tend to be higher than those offered to individuals with established credit histories. To avoid interest charges, it’s crucial to pay your balance in full and on time each month.

Getting a Student Credit Card

To apply for a student credit card, you will typically need to be at least 18 years old and enrolled in a college or university. Some card issuers may require proof of income or a co-signer if you don’t have a steady income or credit history yet. Usually, this can be a parent, guardian or other responsible adult family member.

It’s important to compare different credit card offers and consider factors such as annual fees, rewards programs, and introductory APRs before making a decision.

Life After Leaving School

After graduating or leaving school, student credit cards typically transition into regular credit cards. Depending on the terms and conditions of the card issuer, you may experience changes in interest rates, credit limits, and available benefits. It’s essential to read the terms carefully and understand any adjustments that will occur.

Student credit cards can be valuable financial tools for students, enabling them to establish credit, gain financial independence, and earn rewards. However, it’s important to approach them responsibly and understand the potential pitfalls they present. By using a student credit card wisely, you can lay the groundwork for a healthy credit history and set yourself up for financial success in the future.