Should You Get a Student Credit Card?
- Even during tough economic times, such as in a pandemic, it's good to build your credit.
- Only take out a student credit card if you're confident you can make monthly payments.
- Start with low credit limits, read the fine print, and be wary of high interest rates.
Have you thought about getting a student credit card? Maybe you'd like to earn some extra cash back or travel rewards points, or build your credit. Or maybe you're nervous about credit cards because you've heard they can cause a lot of financial headaches.
The truth is that student credit cards can be a double-edged sword. If you use them the right way, they can help give you a financial leg up over your peers by the time you graduate. But if you use them incorrectly, they can end up hurting you in the long run.
Does this mean you should avoid them? Not entirely. But it's important to know how they work, the right way to use them, and whether you might be a good candidate for one. That way, you can make an informed decision for yourself about whether or not you should get a student credit card.
“If a student lacks discipline, isn’t responsible, and doesn’t have a job, they should not have their own credit card. Period.”
No matter what you decide to do, be sure to build your credit history in other ways. For example, always pay your bills on time, even if you only have a debit account. Utilities, internet providers, and cable companies may report your payment history to credit bureaus, which affects your credit score.
Before considering your own credit card, you should also consider becoming an "authorized user" on your parent's account. This allows you to build a credit history without the risks of starting your own account, while also benefiting from your parent's good credit — if they have it.
Pros of Getting a Student Credit Card
There's a reason that credit cards are so popular. Below are some of their major advantages.
It's true that many student credit cards offer you big rewards in the form of cash back from your purchases or free travel rewards. These perks can help you take trips and buy things you might not otherwise be able to afford.
For example, a credit card that offers 2% cash back essentially gives you a coupon for 2% off everything you buy.
Having a good credit score can be important if you ever want to rent an apartment, open a utilities account, get a cell phone plan, or take out a loan for a house or car. It can affect whether you're approved for a loan and how much interest you'll pay.
An excellent credit score can save you thousands of dollars in interest payments over the course of a 30-year mortgage, for example, if you get a better interest rate because of your good credit score. Potential employers may even check your credit; in some cases, you might be denied a job if your credit score isn't high enough.
Getting a student credit card now (and using it wisely) can help you build your credit score so that it's in good shape by the time you graduate. That's because you'll be adding positive information (e.g., on-time payments) to your credit report, which can increase your credit score.
In addition, the longer you have an open credit card on your account, the more your score can rise. This "length of credit history" variable is one of the hardest credit factors to manipulate. Unless you have a DeLorean, all you can do is open an account, make on-time payments, and wait.
Get More Consumer Protections
One of the things people don't realize about credit cards is that they can actually protect you in many ways that debit cards, checkbooks, and cash cannot.
"If someone steals your debit card info, they can drain your bank account in a heartbeat and there's nothing you can do about it," says Tara Unverzagt, a certified financial planner with South Bay Financial Partners. In contrast, "if someone steals your credit card info and uses it, you can have the charges removed."
Unverzagt also points out that it's easier to get your money back if you buy something but the merchant charges you the wrong amount. "You can call your credit card company and they'll fix it. With a debit card, once it's gone, it's gone."
Cons of Getting a Student Credit Card
Although student credit cards may offer some big advantages, it's important to note that these are easily wiped out if you don't manage your account correctly. Below are some potential consequences if that happens.
You Can Get Trapped in Debt
Student credit cards don't generally come with big lines of credit, like someone with a six-figure salary might get. Still, since you're a student, your income isn't necessarily very high, and it might not take much for you to get stuck in a cycle of debt.
It's easy to rack up a balance on your credit card and only make the minimum payment. You might even think you're doing well by making that minimum payment on time each month. However, if that's all you pay, it could take years to get out of debt, and you'll pay a significant amount of interest charges by the time your debt is settled.
You Can Ruin Your Credit Score
Aside from getting trapped in debt, there are a couple of ways you could end up ruining your credit score with a student credit card. The biggest pitfall is if you don't make your payments on time. Just one late payment can make your credit score tank — the later the payment, the lower your credit score will drop. Even worse, late payments stay on your credit report and depress your score for a full seven years.
An additional way you could harm your credit score is if you rack up a relatively large balance. Another big credit score factor is how much debt you have relative to your credit line. This is known as your "credit utilization ratio." If you're using a big chunk of your available balance, your credit score will likely drop.
Luckily, your credit utilization ratio is one of the easier factors to correct — if you pay off your balance in part or in full, you can help boost your credit score almost immediately.
Should You Open a Credit Card During a Recession?
Right now there's a lot of uncertainty in the financial world. Still, our advice holds: If you're looking to build credit — and especially if you can continue to pay off your balance in full each month — getting a student credit card may be a good idea. People still need to build credit, even in a down economy.
However, if you're looking for a source of funds because you need extra money, a student credit card should be one of your last options. There's a couple of reasons for this.
If you’re looking to build credit, and especially if you can continue to pay off your balance in full each month, getting a student credit card may be a good idea.
First, student credit cards generally don't come with very high credit limits, so you can't really count on them for much. Second, you don't want to start out your credit card journey by plunging into debt. Instead, use other financial resources available to you first.
If you think there's any chance you'll be putting charges on a credit card that you can't pay off by the end of the month, then stop. Relying on a student credit card in this scenario probably isn't worth it.
However, if you're confident you can manage your credit correctly, go ahead and apply for one — just be sure to be sensible with your spending habits, and read the fine print associated with any account you open.
How the Credit CARD Act Changed the Rules for Student Credit Card Borrowers
Not too long ago, it was more common for college students to get into serious trouble with student credit cards. Many credit card issuers put together big sign-up events and advertised directly on campuses, offering student credit cards indiscriminately to just about anyone who wanted one.
That all changed with the Credit CARD Act of 2009, which established new regulations that affected students, including the following:
- Anyone under the age of 21 must demonstrate enough income to pay their credit card bill, or have a co-signer (such as a parent) who can
- Credit card companies aren't allowed to to offer giveaways on college campuses to solicit credit card applications
- Credit card companies cannot send anyone under the age of 21 preapproved offers
This tightened up the rules and it's no longer as easy to get a credit card as a student; however, that's probably a good thing. If you can't pay your bill (or at least have someone who will agree to be a backup), then you probably shouldn't be getting a credit card.
How to Use a Student Credit Card the Right Way
"[In general] I recommend that college students do in fact get a credit card, but only if it has a very low credit limit of $500," says JP Geisbauer, a certified financial planner and certified public accountant with Centerpoint Financial Management. "But if a student lacks discipline, isn't responsible, and doesn't have a job, they should not have their own credit card. Period."
Fortunately, the principles of good credit card use are fairly simple. They may not be easy to follow because you need to have the discipline to adhere to them, but the rules aren't exactly rocket science.
- Look for Low Interest Rates and Credit Unions
Credit unions generally offer lower interest rates on credit cards, which can be a huge advantage. However, students may find it difficult to qualify without a job. In this case, they may need to be added as an authorized user on a parent's account.
Being an authorized user effectively allows students to piggyback on their parents' credit history, which gives them a much-needed boost when it comes to establishing credit and starting their own account.
- Pay Off Your Credit Card in Full Each Month
The first rule of using any credit card is to always pay it off — in full and on time — every single month. If you follow this one rule, you'll be okay.
"I often advise people to start by using the card and immediately going on the app and paying the balance of what they just purchased," says Unverzagt. "That way they know they have 'money in the bank' to pay it."
You might be wondering why you'd want to pay off your balance in full if a credit card only requires a small minimum payment each month. The idea here isn't to finance purchases, says Geisbauer. Instead, your goal is to start establishing credit. And you absolutely do not need to carry a balance in order to do that. It's better to treat your credit card almost as if it were a debit card.
In fact, if you get comfortable now with carrying a balance from month to month, you risk establishing bad financial habits. This could come back to bite you in the future, especially once your credit limit increases after you get your first job after graduation. This is how people end up in debt.
You can still get all of the benefits of using credit cards — rewards, consumer protections, and building credit — without carrying a balance.
- Set Up a Budget
Worried about overspending and not being able to pay off your balance in full each month? There's a simple solution to that, and it'll help you in many other ways as well. If you set up a budget, you won't need to worry about overspending because you'll have a plan for each dollar you earn. Even if you don't have a credit card, it's a good idea to get into the habit of budgeting.
- Set Up Your Bills on Autopay
Another strategy Geisbauer recommends is setting up some of your smaller recurring bills on autopay with your credit card. For example, if you have a subscription to Spotify or Netflix, you can set them up to charge your credit card automatically each month.
You should also set up another autopay — this time from your bank to your credit card. There are a few ways you can do this. You may be able to set up a recurring payment to your credit card directly from your card issuer's website, or you may be able to do this through your bank's website.
This gives you a more hands-off approach so that you don't need to worry about missing your credit card payment each month. That said, you should remember to occasionally check the charges, just in case they're increased during the month (online services sometimes do this).
- Learn How to Build Credit Responsibly
Getting a student credit card can actually be one of the best ways to build your credit. For example, unlike student loans, if you manage your credit card right by paying it off in full each month, you won't ever have to pay any interest. It's a free way to build your credit.
But it's not the only way to improve your credit score, and you should learn about how student credit cards fit in with the overall credit world. For instance, you should learn what factors affect your FICO score and how you can build credit further. The Consumer Financial Protection Bureau is a great source of information, as are many other websites. Use your internet research skills to find these resources.
The Bottom Line About Student Credit Cards
Before considering your own credit card account, make sure you're already making on-time payments with your bills and utilities, as missing payments can affect your credit regardless of whether you have a credit card.
Next, consider becoming an authorized user on a parent's bank account. This is a good way to establish a credit history, and it also allows you to benefit from the lower interest rates and favorable terms of credit unions, as compared to commercial banks.
If you've done all that and still want to open your own account, then a student credit card may be a good option. "Yes, college students should get credit cards. There is no better way to start your credit history. And it's far easier to get your first card as a college student than after you graduate," says Unverzagt.
If you know you won’t be able to manage the demands of paying off your credit card each month, or if you think you’ll be tempted to spend more than you can afford, it’s better to wait.
Additionally, according to Unverzagt, "There are some cards (like Discover) whose business model is to catch college students and keep them for life. They're willing to lose small amounts on some of these 'unknown creditors' in exchange for getting lifetime loyalty from many that are good creditors."
That said, both Unverzagt and Geisbauer caution against some students getting student credit cards. If you know you won't be able to manage the demands of paying off your credit card each month, or if you think you'll be tempted to spend more than you can afford, it's better to wait. There will still be plenty of credit cards in the future when you're ready.
But for those who are ready now, getting a student credit card — if you use it responsibly — can help you take a big step forward financially.
Editor's Note: This article contains general information and is not intended to be a substitute for professional advice. Please consult a professional advisor before making decisions about financial issues.
Feature Image: Eva-Katalin / E+ / Getty Images