The college years are an excellent time for young people to get their first credit cards so they can start building a solid credit history for the rest of their lives. Many banks and credit card issuers offer products specifically intended for college students, and many have attractive features such as the ability to earn rewards, low introductory interest rates, and no annual fees. Here's what to look for when choosing your first student credit card, and a few of the best products on the market.
Why you need a credit card
Students should consider a student credit card because it's one of the best ways to establish and build credit. This follows from the fact that 35% of your score comes from your payment history, 30% comes from your outstanding balances, 15% comes from the length of your credit history, and the rest comes from your new credit and the types of credit accounts you use.
If you don't have any loan accounts yet -- mortgage, auto loan, etc. -- and most college students don't, there's no information on which to base your credit score. Thus, the best way you can establish a credit score by the time you graduate from college is to obtain a credit card and start building a strong payment history by using it responsibly.
How is a student credit card different?
A student credit card isn't much different than a traditional credit card except that it's designed for people who don't necessarily have any established credit history. However, you do need to show that you can pay the bill yourself, so you'll need to have steady income. If you don't have a job or another income source, you'll need a co-signer.
Because students generally don't have an established credit history or lots of income, credit limits tend to be much lower than standard credit cards. Typically, student credit cards come with an initial limit of between $500 and $1,000; but there are exceptions to this.
Three great examples
Here are three of the best student credit cards, as well as the benefits and potential drawbacks of each.
1. Capital One -- Journey Student Credit Card
This card offers 1% cash back on all purchases, as well as a 25% bonus on cash back for every month the bill is paid on time. Cardholders also have access to a credit tracker, so they can monitor their credit, and see the effects of their credit behavior on their scores.
Capital One will increase the initial credit line after five on-time payments, so this could be a good card for students who would benefit from incentives to develop good credit behavior. The account has no annual fee, as well as no foreign transaction fees, making it a good choice for students who may travel or study abroad. The 19.8% variable APR is a bit on the high-end, but that's to be expected for people who are just starting to establish credit.
2. Discover – it Chrome for Students
Like the Capital One card, the Discover it card offers 1% cash back on purchases, but sweetens the deal with 2% cash back at gas stations and restaurants. There's no annual fee, no foreign transaction fee, and an introductory 0% APR for six months -- but it can be as high as 21.99% afterwards.
There are a few distinguishing features of the Discover card. Customers will get an actual FICO score -- not just a credit tracker -- which is the same credit scoring model most lenders use to make decisions. And the card is more forgiving than others, with no fee for the first late payment.
On the negative side, Discover cards aren't as universally accepted as Visa or MasterCard credit cards, so you're more likely to run into acceptance issues.
3. Citi ThankYou Preferred Card for College Students
This card has the best introductory bonus of the three, with 0% introductory APR for seven months, and 2,500 bonus reward points -- worth about $25, depending on how you redeem them -- after making $500 in purchases within three months. It also has arguably the best permanent rewards, with double rewards on dining and entertainment purchases.
It's a MasterCard, so it has nearly 100% acceptance, and has no annual fee. However, one potential drawback is that this is the only card listed here with a foreign transaction fee, which can be rather costly if you travel often. Another is that the Citi card has the highest range of interest rates, with a possible APR of up to 23.99%.
There are many more credit cards for students, and many great products are issued by local credit unions and smaller banks. So it pays to do some research and compare the benefits, especially if your college's credit union has its own card.
A word of caution
Finally, remember that, just because you get a credit card doesn't mean you should carry a balance or spend more than you normally would. When used properly, student credit cards can be an excellent tool to build your credit and make your financial life much easier in the future, or they can be a tremendous burden if used irresponsibly.
The best thing you can do for your credit is to get just one or two student credit cards and use them for purchases you plan to pay in full every month. Here's a more thorough description of how your credit score works, and how to build yours, so you can make sure you're using your credit card in the best possible way.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of Capital One Financial., Citigroup Inc, MasterCard, and Visa. 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.