It's back-to-college season, and parents are weeping (or celebrating) as their college freshmen head off to school. One of many things they'll have to learn about as they start to navigate life on their own is how to handle their finances responsibly, and a credit card can be a great tool toward that end. Three card offerings stand out above the rest for students -- and for investors, there's one bank in a good position to use the relationships developed on college campuses to help expand its business portfolio.
Should you send your student with a card?
Whether credit cards are harmful or helpful is the source of much deliberation in households across America. While cards can be overextended and harmful in a variety of circumstances, they can also help any 18-year-old when used properly.
The decision to send your child off with a credit card is largely a personal one, but if the new student treats it like a debit card rather than a source of money for which only a minimum payment has to be met each month, it can be a helpful tool. For example, cash-back rewards and benefits, in addition to being a great perk, can provide great security in the event of an emergency, educate the student about personal finance, and serve as a principal tool in building a credit score, which helps people secure loans for big-ticket items such as cars and houses.
Many companies offer fee-free cards designed for students, and, of course, if your child pays off the balance every month, no interest will accrue.
Parents should also note that the Credit Card Accountability Responsibility and Disclosure Act of 2009 now requires anyone 21 or younger to either have a co-signer or a proof of income that shows they can repay their debts.
With all that in mind, let's look at three potential card options, all of which have no annual fee.
Discover Financial Services (NYSE: DFS ) : Discover it Card for Students
The Discover it Card was released at the beginning of this year to much fanfare, with a press release touting it as "game-changing." Since it offers a wealth of benefits and currently holds a 4.8-star rating out of five from its cardholders, it's easy to see why this is a great option for any student.
- Rewards: 5% cash back on rolling categories every quarter and 1% cash back on all other purchases.
- Rate: 0% for six months and then 12.99% to 21.99%.
Discover ranks No. 2 in J.D. Power and Associates' 2013 Credit Card Satisfaction Study, narrowly missing the top spot held by American Express for the past seven years. There's also no foreign transaction fee, which is helpful for any student who may spend a semester abroad.
Bank of America (NYSE: BAC ) : BankAmericard for Students
While Bank of America has had its ups and downs in recent years, the BankAmericard has remained a helpful card for any student. Its 3-2-1 cash-back feature is helpful for both road trips and late-night runs to load up on ramen noodles at the grocery store.
- Rewards: 3% on gas purchases, 2% on groceries, and 1% on everything else.
- Rate: 0% for 15 billing cycles and then 10.99% to 20.99%.
Bank of America also helps holders of these cards learn about personal-finance basics such as budgeting and building credit with its "Ultimate Money Skills" tips. And because it's a Visa card, it's accepted at more places than the Discover it Card for Students.
Capital One (NYSE: COF ) : Journey Student Rewards
The final option comes from Capital One, which offers a card intended for "[s]tudents with limited or average credit who want to build credit and get rewarded for it." It's recommended by 91% of its reviewers and sports a strong rating of 4.4 out of five stars.
- Rewards: 1% cash back on all purchases and a 25% bonus on the cash back earned when the bill is paid on time.
- Rate: 19.8% variable APR.
This card lacks some of the benefits of the other two, but one major benefit is that users have access to their monthly credit scores and can freely monitor their credit -- a great tool to help students prepare for life beyond college.
The bank set to benefit
So which option is the best for investors? Keep an eye on Discover, which is making a big play in the student market through both its credit card offering and its rapid expansion in the student-loan industry. Its student-loan holdings have increased by 50% over the past two and a half years.
What's more, Discover has ranked No. 1 in the Brand Keys Customer Loyalty Engagement Index Report for the past 17 years. So if it's able to begin building a loyal customer base at a young age, it could benefit the company for years to come.
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