‘Should I get a credit card for college’? Not surprisingly, that’s one of the most common questions students ask when starting college. College is a time of new experiences and responsibilities. For many students, it’s also their first experience with being financially independent. And what better way to flaunt their financial independence than with a student credit card?
The big question though is, are credit cards for students a good idea? There’s no single answer that’s right for everyone. Getting your first student credit card can be exciting. However, there are a few pros and cons of credit cards for college students that you should be aware of.
Before getting a student credit card in college, you must take time to understand the benefits as well as the downsides. This will help you make the most of your financial freedom while protecting you from potential financial harm.
Pros Of Getting A Student Credit Card In College
1. Helps to start building credit score early
Your credit score is a 3-digit number that reflects how you handle lines of credit. Lines of credit include student loans, credit cards, and personal, home, and vehicle loans. Making all loan and credit card payments on time helps to build your credit score over time.
So why does credit score matter? A high credit score indicates that you are a financially responsible person. This will make it easier for you to get approved for any type of loan or credit card in the future.
However, it takes time to build a good enough score to enjoy lower interest rates. But with a student credit card, you’ll get a head start. The sooner you get started, the more time you’ll have to improve your credit score. Getting a student credit card in college and making all payments on time will give you more time to build your credit score. Keep in mind, the key to building a strong score is making all payments in full and on time every time.
2. You’ll enjoy lower interest rates on loans in the future
Building a strong credit score can also translate to lower interest rates on loans and lines of credit. Lenders and credit card companies typically quote lower interest rates when offering loans to individuals with strong credit scores. This is because a strong score indicates that you’ve been making all payments on time, which is what lenders look for.
Loan applicants with a credit score of 760 or higher are approved easily for all types of loans and credit cards. Moreover, they are also charged a much lower interest rate than loan applicants with a credit score of 620. If your score is below 620, you’ll find it difficult to get approved for any type of loan or credit card. Even if you do get approved, the APR or annual percentage rate will be much higher than if you had a good score.
The lower interest rate can save you thousands of dollars in interest when the time comes to take a mortgage or a car loan.
3. It’s a great way to get hands-on learning on handling finances
You may know everything there is to know about handling finances but there’s a huge difference between theory and practical experience. Without actually handling a credit card yourself, it’s impossible to really understand the implications of ‘financial responsibility’. Credit cards are an effective tool for teaching college students about money management since the effects are immediately felt.
For example, every credit card has a credit limit that’s set by the card issuer. You can only spend up to the credit limit on your card. Once you read that limit, you can’t use your card for any more purchases until you’ve first paid off the outstanding. That means you must learn how to budget your expenses based on your credit limit per month. You must learn to adjust housing, food, and other miscellaneous expenses so that you don’t exceed your credit limit. It may sound easy in theory but in reality, balancing expenses can be quite challenging.
Cons Of Having a Credit Card in College
1. Late payments can push you further into debt
Credit card companies make their money from late payments. If you miss the payment deadline, they will charge you a steep penalty as well as high interest on the outstanding amount. This interest will keep accumulating until you clear the balance. The late fee and interest can add a significant amount to your next bill, making it even more difficult to clear the full balance. If you’re not careful, overspending and late payments will push you further into debt. This is one of the biggest drawbacks of having a credit card in college, especially if you’re careless with your finances.
2. Late payments can damage your credit score
On-time payments add to your credit score and help you build a strong score over time. However, every late payment will pull your score down by a few points. A bad credit score can take some time to repair. Moreover, the late payments will be reflected on your credit report where it will stay for the next 7 years. When you apply for a loan, lenders will be able to see these late payments and are more likely to reject your loan application. A credit score that’s damaged by late payments can limit the major financial decisions you can make in the future.
3. Bad money habits can affect the main cardholder
More often than not, college students get a credit card that’s an extension of their parent’s credit line. This is because it’s difficult to get a credit card without a credit score and you can’t build a credit score without a credit card. This leaves most students in a catch-22 situation. One solution is to get added to their parent’s credit card. When you do this, you’ll have a joint account sharing the limits and balances of your parent’s credit line. If you fail to pay your outstanding on time it will affect the main cardholder’s credit too.
4. You’re likely to be tempted to spend more
Without a credit card in your pocket or wallet, you’re forced to make do with whatever cash you have in hand. With a credit card, it’s easy to give in to impulse purchases. Each purchase may seem small but it all adds up to a substantial amount at the end of the month. Rather than save up for an out-of-town trip, that latest smartphone model, or concert tickets, you’re more likely to finance it immediately with your credit card. It feels great at that moment, but it’s a habit that can be financially crippling in the long run.
There you have it: the pros and cons of credit cards for college students. For parents, give it a test run by opening an extension line of credit for your kid with a significantly lower credit card limit. If they can make payments consistently, then should you consider giving them a wider leeway.
Credit Cards for College Students with Bad Credit
Very few card issuers offer credit cards for students with bad credit. They usually require applicants to have good score to get approved. If you have bad credit, the few issuers who do approve your credit card application will almost certainly quote a prohibitively high-interest rate. It’s risky to carry a high-interest credit card as one late payment can send you spiraling into debt.
Getting a secured credit card is the best alternative to getting a credit card for students with bad credit. These cards work differently from regular credit cards. To get a secured credit card, you must first deposit money into a savings account. The bank will then issue you a secured credit card using the money in your savings account as a security deposit.
Your credit limit is equal to the amount in your account. That means you can only spend up to the amount you’ve deposited into your savings account. You cannot spend any more than that. If you’ve used up the full amount in the savings account, you’ll have to deposit more funds to renew your credit limit.
The advantage of getting a secured credit card is that it gives you the opportunity to build your credit score without worrying about late fees. Building your score will make it easier for you to apply for more flexible credit cards later on. The only downside of a secured credit card is that you must keep replenishing the funds in your savings account to extend your line of credit.
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