In many ways, getting a student credit card is easy. Anyone with a computer can search for "student credit cards," fill out an application, and potentially get a credit card. However, to do it right, there are a few things about credit cards, and how to choose the right one, that college students should be aware of.
With that in mind, here's a quick guide to the pros and cons of student credit cards, the rules that dictate who can get a student credit card, and how to compare the various student-focused credit card products currently on the market.
Know the rules
The credit card culture on college campuses across America certainly isn't what it used to be. When I was in college in the early 2000s, credit card companies would give away free T-shirts, pizzas, and other goodies in exchange for applications. The companies didn't necessarily care if the students had any established credit, nor did they care if the students had any income that would justify giving them a credit card.
As you might imagine, there was a serious problem with having college students take on way too much credit card debt. While student credit card debt levels never came close to student-loan levels, credit card debt is far more dangerous, especially while in college. For example, you can defer student-loan payments until you're out of school, and interest rates are in the mid-single-digit range. On the other hand, there's no such option to defer payment with credit cards, and student credit card interest rates often exceed 20%.
To help fix the problem, the CARD Act of 2009 made some big changes. Specifically:
- Credit card companies are no longer allowed to give students gifts in exchange for an application.
- Unless they consent to receiving them in advance, students under 21 cannot be targeted for pre-approved credit offers.
- To get a credit card before age 21, consumers need to be able to demonstrate an ability to repay their debt, or they'll need a co-signer.
The third rule is the most important to know if you're actively searching for a student credit card. Depending on your age, you may be asked to prove your income, or to provide a cosigner who has income, such as a parent.
Know the benefits of responsible credit usage
By far, the most important benefit of getting a credit card as a college student is the ability to start building your credit at a young age. If you use a credit card responsibly, it's certainly possible to graduate college with an above-average credit score, which can give you a big advantage when applying for a car loan, trying to rent an apartment, or even searching for a job.
By "responsible use," I mean behaviors like these:
- Paying your bill on time, every single month. Thirty-five percent of your FICO credit score comes from your payment history, and a single late payment can linger on your credit report for seven years.
- Keeping your balance low, relative to your credit limit. Experts suggest using a maximum of 30% of your available credit. That means that if your credit card limit is $1,000, you should aim to keep your balance at $300 or less. Lower is better.
- Keeping the same credit card open for years, as opposed to opening and closing credit accounts frequently. Fifteen percent of your FICO score comes from the length of your credit history, which includes the ages of your individual accounts, the average age of all of your accounts, and the age of your oldest account. If you're a college student, and the only account on your credit report is a single credit card, it can be the only factor in this category.
Know the other benefits of credit cards
In addition to building a credit history, there are some other good reasons to consider a student credit card.
Having higher purchasing power is certainly a benefit. If you're not getting paid until Friday, and you need to buy a book to study for an exam on Wednesday, a credit card can allow you to do it. Not having to carry cash or rely on a debit card is another benefit. Generally speaking, credit cards have far greater protections for unauthorized charges than debit cards do.
Know the drawbacks
Some of the benefits can also be the biggest drawbacks of having a credit card, if you use it improperly.
For example, if you don't make your payments on time, or if you max out your credit card regularly, it could do significant damage to your credit, which can haunt you after you graduate. If you're not confident that you have enough discipline to properly manage a credit card, don't get one. It can be next to impossible to rent a decent apartment if you have a record of late payments and collection accounts on your credit.
Know what to compare
There are a few factors to consider when looking for a student credit card. For starters, you want to find a card with no annual fee, which most student-targeted credit cards are.
Interest is another obvious thing to look at, as is any card-specific money saving perks. For example, students who plan to travel internationally may want to select a card with no foreign transaction fees.
Rewards are another factor, and this includes any introductory bonus. Student credit cards typically have much lower reward and bonus offers than cards targeted at consumers with established credit, but there are some decent student reward cards, as well as cards with 0% intro APR offers. Fortunately for you as a consumer, competition has never been higher in the credit card industry, and this has produced some of the most generous offers that have ever existed.
Shop around for a student credit card
Several major credit card issuers -- Discover, Capital One, Citi, and Bank of America, to name just a few -- offer credit card products specifically designed for college students with limited credit history, but who have income (or a co-signer). All of the student credit card products I've been able to find have no annual fee, and most offer some sort of rewards program, so do some comparison shopping and find the card that best meets your needs.
Not approved, or don't trust yourself? Consider a secured credit card
As an alternative to a traditional credit card, college students may want to consider a secured credit card.
In a nutshell, secured credit cards work just like a normal credit card, but you put down a deposit to open the account. The deposit is fully refundable and determines your initial credit limit.
Just like a standard credit card, a secured card incurs interest charges when balances are carried, and minimum payments must be made each month. Also like a standard credit card, a secured card reports your activity to the three major credit bureaus, which can help you build credit.
Because you're putting down a deposit, a secured card is often much easier to qualify for than a standard (unsecured) credit card, and since you're putting up a deposit, it can eliminate the feeling of spending money you don't have.
There are plenty of secured credit cards available, so check out our current favorites to see if one of them might be the right choice for you.