Perhaps it's no surprise that college is when many Americans open their first credit card. For cash-strapped young adults, carrying a little plastic in their wallet means financial flexibility in case of an emergency. The university years are also a good time to start building a credit history and a good credit score. See Start Building Solid Credit At A Young Age.
Lenders tend to see younger consumers as a prized demographic because they represent a potential income source for years, even decades, to come. One of the primary ways they try to woo first-time users is with a narrowly targeted product called a student credit card.
In some ways, these cards are an appealing option for college-age shoppers. Many offer cash back or other rewards based on the amount the cardholder spends. They also come with a relatively low credit limit, which keeps the temptation to splurge in check.
However, not all offers are created equal. If you’re a student looking to create an account in your own name, be sure to read the fine print before signing on to one.
Shopping Around Pays Off
In many cases, students are reactive when it comes to selecting their first card, applying for whatever offer they get in the mail. However, student cards can vary significantly, so it’s worth doing a little comparison shopping.
For example, some cards will charge an annual fee while others don’t. Unless there’s a compelling reason to pay this extra charge, you may want to stick with a no-fee option.
One of the ways that lenders entice new customers is by waiving interest for the first several months that you use the card. After the promotional period, it shoots up to the “regular interest rate.” Too often, consumers are drawn in by the 0% teaser deal and ignore the long-term rate.
Students should keep in mind that they’ll probably have to pay a higher percentage than other borrowers because of their limited credit history. But beware of cards that charge substantially more than others. Look at several offers before you choose one.
As important as fees are, they’re only one side of the equation when it comes to student cards. Many issuers have added rewards programs with their student card, which are particularly beneficial to those who pay their balance in full each month – a habit you should try to establish.
A number of cards offer 1% cash on purchases, and some extend more generous perks for certain expenditures. For example, the Discover it® chrome for Students card also gives 2% back for gas and restaurant purchases.
Keep in mind, though, that these benefits probably aren’t worth a sky-high interest rate – or even an annual fee. If you spend an average of $200 a month, for instance, a 1% reward will net you $24 for the year. Make sure you do the math before settling on one product over another.
Tougher to Qualify
Initially, the biggest draw of college-targeted credit cards was that they were easier to qualify for than other accounts. Things got a little more complicated with the passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, also known as the CARD Act.
As a result of the law, card applicants under the age of 21 have to demonstrate that they have sufficient income to pay down their debt – in other words, a decent job or other income source. Otherwise they need a co-signer.
If that’s prohibitive, you may want to pursue other ways of building your credit history. One alternative to a student card is becoming an authorized user on your parent’s account. If you carry a balance from month to month and the primary account holder has a low standard interest rate, you may be better off from a cost perspective. However, this can by a tricky arrangement; it helps if both parties agree ahead of time on how much you can spend and how much you should pay off in each billing cycle. In addition, if your parent doesn't pay on time for some reason, his or her bad credit score will also become yours.
Another option is taking out a secured credit card. In this case, you make an initial deposit, which the bank uses as collateral. Among the advantages: It’s easier to qualify if you have no credit history or a low FICO score. However, unlike becoming an authorized user, the age limitations of the CARD Act still apply.
The Bottom Line
Student credit cards offer useful benefits for those who don't yet have a strong credit history. Just be sure to do your research before you sign up and start with no more than one or two. For more on this, see Best Credit Card Features For Students and The Best Time For Young People To Get A Credit Card.