Student credit cards can be useful not only because they make purchasing easy, but also because they help young people establish credit histories -- ideally good ones -- that can help them in the years ahead.
That said, it can be dangerous to spend four years (when you typically have little or no income) with a piece of plastic in your pocket that lets you buy whatever you want.
Before the CARD Act of 2009, credit card lenders would often prey on young college kids, marketing to them aggressively. 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.
Regular vs. Student Credit Cards
Student credit cards are much like regular credit cards, but with a few twists.
Like other credit cards, they let you charge purchases and pay later, adding interest charges to your bill if you don't pay on time. They come in the usual varieties, offering cash back on purchases or rewards in the form of points that can be redeemed for desirable things.
Unlike other cards, student credit cards often have some special features, such as low credit limits. These can be like training wheels, allowing students to get used to paying bills regularly while not letting them rack up too much debt. Some will gradually increase the credit limit after a certain number of on-time payments.
Also, because of new laws, in order to qualify for a student credit card, you may need to have an older person co-sign for the card.
How to Choose a Student Card
There are many websites, such as BankRate.com, Credit.com, CreditCards.com, CardRatings.com, CardHub.com, IndexCreditCards.com, and NerdWallet.com, that can help you compare and select cards. Here are some factors to consider when you evaluate student credit cards:
- Compare interest rates: Check out the interest rates for any cards you're considering. Lower is better, but ideally, bills will be paid in full each month. Know that low teaser rates will likely be replaced by higher rates in short order.
- Assess annual fees: Some cards charge an annual fee, while others don't. There's no need to sign up for a card with an annual fee, but sometimes it can be worth it, if it offers sufficient rewards or cash back.
- Decide if you want points or cash back: Decide whether you want a card that pays you cash back or rewards points. For beginning credit card users, cash back can be simpler, and it can help them avoid being influenced into spending more in order to get more points.
- Consider co-signing or going it alone: Decide whether you want or need a co-signer for a card. Remember that co-signers will be on the hook for any bills the college student doesn't pay, and their credit record could potentially take a hit if the credit isn't managed responsibly.
Encourage Smart Use
Parents can help their youngsters learn how to use credit wisely by teaching them to:
Think critically about various spending decisions: Students shouldn't try to spend $1,000 in order to get enough points for some free pizzas, for example.
Consider how costly interest can be: For example, if they charge just $1,000 on a card with a 21% interest rate and minimum payments of 3% (or $20 a month), it will take nearly seven years to pay off the debt, and they will pay more than $800 in interest.
Remember, this is part of your permanent record: As your child is building credit, all of his or her good deeds and bad ones will be recorded for posterity in his or her credit file. These first years of credit use can go a long way toward establishing a stellar history of money management.
Used well, student credit cards can be a boon. Used irresponsibly, they can be a big mistake.