A student credit card is nearly identical to a regular credit card. Like other credit cards, they let you charge purchases and pay later, and they charge interest on any unpaid balances. They come in the usual varieties, and some even offer things like cash back on purchases or rewards points.
The difference is that student cards are geared toward young people who are new to credit and may need training wheels. They typically have low credit limits to limit spending. Some will gradually increase the credit limit after a certain number of on-time payments.
Why the cautionary features? After all, when college students get their hands on their first credit cards, what could go wrong?
A history lesson: The CARD Act
Before the CARD Act of 2009, credit card lenders would often prey on young college kids, marketing to them aggressively. As a result, many college students graduated with not only a heap of student loans, but also substantial credit card debt.
Today, many of those marketing practices are restricted. Now, credit card companies cannot offer pre-approved cards to anyone younger than 21. They must also require proof of income from a card applicant or an older co-signer.
That said, there's a case to be made for -- and against -- college students carrying credit cards.
The case for credit cards in college
A credit card can be a useful tool for college students:
- Access to money for emergencies: Having a plastic card handy can be helpful in case of an emergency. If Junior suddenly has to pay for a car repair or an urgent-care visit while on spring break somewhere, he can charge it.
- Teaches important skills: College kids with credit cards can develop some money-management skills, ideally learning to only charge what they can afford, for example.
- Helps to establish a credit history: All of us will need to develop solid credit histories in order to build strong credit scores to give us the best interest rates when we need to borrow money -- say, for a first car loan. Having a credit card in college is a chance to start establishing that history.
- Allows for adult supervision: If parents co-sign for the card, they can likely receive copies of statements, enabling them to keep an eye on transactions.
The case against credit cards in college
On the other hand, it might not go so well. Here's why:
- It's easy to accumulate debt: Unchecked, debt can accumulate quickly, leaving Junior -- or mom and dad -- with hefty interest charges.
- Bad habits will lead to a poor credit history: If the card isn't used responsibly, then the credit history that's being established early will be a poor one, leading to steep interest rates when it comes time to borrow money in the future.
- Junior's mistakes can hurt mom and dad, and vice versa: If parents co-sign for a credit card, and Junior messes up, those credit dings will show up on everyone's credit report. Similarly, if mom and dad miss payments, or charge more than the credit limit, those boo-boos will show up on their child's credit history.
What to do
Given the pros and cons, each family needs to decide what's best for their college kids.
- Set ground rules: Many money management lessons are learned at home. Explain to Junior what he or she can and can't charge -- reviewing categories such as books, pizza, travel expenses, concert tickets, and tattoos. Explain how crippling debt can accumulate quickly with steep interest rates. Point out costly fees that should be avoided, such as those for exceeding a credit limit or paying bills late. Stress the importance of keeping cards in a safe place and not charging online in an unsecure environment, where card data can be stolen.
- Start off with a debit card: A debit card offers many of the same perks as plastic, but it doesn't allow spending to get out of control.
- Consider a student credit card: Because of the built-in credit-line limitations, Junior can get some practice using plastic with some stop-gap measures if things go off the rails. And if things go well, your progeny may qualify for a student card that offers rewards points or cash back, just like a normal card.
The bottom line
College is a time for learning, growing, and preparing for the real world. So whether or not a student card is a smart idea for your child, make sure he or she learns good money management skills before claiming their diploma.
Selena Maranjian owns shares of American Express and JPMorgan Chase. The Motley Fool recommends American Express. The Motley Fool owns shares of Capital One Financial. and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.