(With assistance from Christina Ntova)
What factors should students consider when choosing a credit card?
Choosing a credit card in the present world is challenging, especially for students, as most do not have previous experience or knowledge; millions of catchy advertisements can sway them to an uncertain choice. First, we examine students who plan to pay the balance on time. These students usually focus on annual fees (generally, cards with no annual fees) and the associated perks. Credit cards offer perks such as points, cash back, no currency conversion fees, rental car insurance, extended product warranty, lowest price matching, and trip cancellation insurance.
If a student does not plan to pay the entire balance each month, they should pay more attention to the usual factors. These credit card details include interest rates and late fees, balance transfer fees (when changing credit cards), cash advance fees, foreign transaction fees, etc.
In sum, a student would need to examine their expenses (many say to track them for one month) or know of any upcoming expenses and should choose the credit card accordingly. They would want to line up different features and see which ones they value the most, and then see which credit card offers those features.
Students also should be wary of applying for too many credit cards at once, as hard credit inquiries can negatively impact their credit score temporarily. (Soft pulls, such as checking your score through an app, do not impact your score.) Usability is another critical factor to note. Is the credit card you choose widely accepted by merchants? Finally, students often look for a frictionless application, meaning Venmo credit cards may become more popular among students. However, because of potential perks lost, a student should take time in selecting the right credit card for them.
How can college students benefit from getting a credit card?
A student benefits mainly by borrowing against future income for expenses now. For example, suppose a student needs to buy a textbook now, but their paycheck will arrive in two weeks; with a credit card, the student can safely make the purchase now. This same thinking also applies to emergencies. An extra benefit lies in the card's statements -- these can serve as proof of purchase if a receipt is lost. The canalso help track monthly expenses so a student can design a budget that aligns with their specific needs and habits.
In addition to money now, two other significant benefits of a student owning a credit card in college are:
- Building a credit history, especially if a student is a new immigrant or international student, and establishing good credit habits.
- Available credit usage -- the percentage of credit used compared to your limit -- impacts credit scores. Generally, the more you use your available credit, the lower your score will be (experts say usage should not exceed 30%). Therefore, making on-time payments and increasing that credit limit benefits your score. For example, spending $600 of a $1,500 credit limit will be a 40% credit usage, but $600 used in a $2,500 limit only accounts for 24% of the available credit. All of these factors, along with fees and interest payments, contribute to students learning good payment habits to avoid stiff penalties. Hopefully these habits will translate to other areas of a student's life.
What should college students know before making credit card purchases?
Apart from missing benefits or getting charged extra fees, students must have a set budget and not surpass their limit through extreme purchases, even if the credit limit permits it. Always make sure you can pay the total balance, or at least the minimum balance, each month. And remember, getting a new credit card to pay for another is not a good idea; the snowball effect it can create may be greater than you'd expect, and banks are likely to find out.
Lastly, with respect to cash or a debit card, the credit card offers these pros and cons:
- Pros: A student receives extra perks and usage rewards, establishes a good credit history, and learns to manage expenses independently.
- Cons: A student has to spend time accounting for the amount spent. With cash, if the money is not there, it simply cannot be spent.
