With great rewards come great responsibility. We'll show you:
- How to stay out of debt
- How interest and other bank fees work
- What the best cards for students are
- How to build good credit
We've included guidelines for parents, too, who may be co-signing or otherwise involved in helping open an account. If you're not super familiar with credit cards, use our credit card glossary for reference while you read.
Stay Out of Debt with Your Student Card
If there's one thing you don't want to do with a credit card, it's getting in over your head with debt. It's tempting to test out your new financial freedom with your first credit card, but there's a catch-22 here: if you're really ready for a credit card, you'll have the good sense not to max it out.
Avoid accruing interest
A recent study found that over a third of current U.S. students are already struggling with substantial credit card debt. If the average interest rate for student credit cards is around 13 percent, let's look at how much that's costing the students who carry credit card balances.
Rose gets a credit card over the holidays during her sophomore year. She learns that her limit will be $2,000 and her interest rate will be 13.14 percent. She figures out that if you take your annual interest rate and divide by 12, you get the amount of interest you're charged per month. After a few months with her credit card, she finds herself with more debt than she thought, so she decides to look at her statements :
On January 1, she had a balance of $1,000 balance on her card—the cost of a new laptop, because her old one broke. Her monthly interest rate is %1.095. So she can see that, in the month of January, $10.95 was charged in interest on her balance:
January 1 Balance: $1,000.00
January Statement Amount: $1,010.95
Minimum payment: $25.00
She sees that, without interest, after making the minimum payment in January her balance would have been $975.00, but, because of interest charges, she lost $10.95.
February 1 Balance: $985.95
New charges in February: $171.00
Looking back at February she winces a little bit: she had $171 in new charges—some of those things were important, like gas and a new Chemistry textbook, but most of it went to dining out at random places with her friends.
Rose sees that, without interest, her balance would be $1156.95, which is bad enough. But with interest...
February Statement: $1169.62
Minimum payment: $25.00
Rose decides to follow some advice she got from her mom and pays double the minimum payment—$50.00. Her March balance is $1199.62, and she resolves not to add to her debt until she is at least paid down to $400, which is 20 percent of her total credit limit.
Understand Interest and Other Bank Fees
The average rate for a student credit card is 17.20 percent as of November 2019 - higher than the national average (16.71 percent).
Credit card issuers set student credit card interest rates on the credit rating of the applicant—if they apply alone—or the combination of the applicant and the co-signing adult. If the student makes sufficient money at a part-time or full-time job to make regular payments, or if the parent has a good credit history, the rate will be lower. If the student is relying on the parent's credit score, and it is poor, the interest rate will be higher.
The Credit CARD Act limits when a credit card company can increase rates on a new card. The law also limits rate increases on the existing balances of a card. Here are the times when a credit card company can raise your interest rate:
- After the introductory promotional period ends, which by law must at least six months
- If the credit card owner has agreed to a variable rate, then the rate will increase or decrease based on a published index
- If the card user is more than 60 days late in making a monthly payment
- If the card user, after agreeing to a workout plan to pay off excessive debt, fails to make the agreed-upon payments
- If the cardmember is a military service member who is no longer on active duty. Federal law caps credit card interest rates at 6 percent for active duty service members but the rates will likely rise to market conditions when active duty ends.
Your rights when rates increase
Before any changes can go into effect, the card company must notify consumers of rate changes. The card issuer must communicate intended rate increases or other changes to terms 45 days before the change goes into effect. The credit card company must also make clear that the cardholder has the right to opt out of the agreement or to cancel their account. These increased rates will go back down, as long as the cardholder starts making payments on time. The credit card company is required to review the account every six months.
When a student signs up for a card, he or she has the option to choose for an "over-limit" fee. If the student chooses that option, he or she can exceed his or her credit limit, but a fee will be charged to the account. If the student decides against the over-limit fee and tries to make a purchase that is beyond the credit limit, the purchase will be declined.
The Credit CARD Act requires that any fees charged for over-limit purchases are "reasonable," but the credit card company determines the actual amount. The student must make a good financial decision whether the convenience of over-limit is worth the fee.
By law, the credit card company can charge an over-limit fee only once per billing cycle. Students have the option to opt-out of the over-limit fee program at any time online, by phone or letter.
Let's say you find a slightly used new Apple MacBook online. And, even though you don't really need it, the laptop has 512 gigabytes of onboard flash storage, a 1.2 GHz processor, a turbo boost up to 2.6 GHz, and 8 gigabytes of memory. The original purchase price from Apple was $1,599, but the seller is offering it at an amazing 30 percent off—only $1,120. What a deal—save $480! But let's see how it works out:
Say you pay for it with your credit card and have an advantageous interest rate of 13.14 percent. The monthly payment will be $95.20. At the end of 36 months, the payments will total $1,273, with $153 of it in interest. And that's the ideal scenario. Less ideal would be if you decide not to pay the $95 for three months, because it's summer and you're spending money other places—then the bill becomes even higher, because interest is charged on a higher balance.
Saving money, especially on an item that is useful and will last for several years, is a good idea. But a student must balance the value of the savings against the impact the purchase will have on his or her finances for the coming years.
Guidelines for Parents
Are most kids going to be psyched about getting a credit card? Of course. But it's parents who can introduce this foray into adult life as an opportunity to demonstrate maturity. Whether you've chosen to co-sign a credit card with your child or no, you still have the opportunity to teach some key financial lessons:
Because of the rules established by the Credit CARD Act, your student is actually safer with a student credit card than he or she will be when they leave college and get a card as an over-21 adult.
Have your child create a monthly budget of expected expenses, including a certain amount for restaurants, concert tickets, and other fun stuff. That budget must be based on income from work (or parental allowance)—not on the card's credit limit. Any purchase amount can be imagined as a loan from their next paycheck or allowance.
The key behavior for a student to use his or her credit card for smaller purchases—basically the same purchases he or she would be making with cash. While credit card companies often provide rewards based on frequent card usage, the net value of those rewards is unlikely to overcome the financial impact of paying late fees for overusing a card.
If the student wants to make a larger purchase, treat it as a big deal. Chart out how long it will take to pay off the purchase, which will include paying interest on the purchase; and consider all the things he or she will not be able to afford in the coming months as a result of the purchase.
Your son or daughter should download the app and visit the website of their credit card company at least once a week as a general rule. They'll need to ensure that any charges to the account are correct, and most importantly can keep on top of balances.
A student credit card provides a young cardholder with the opportunity to build a good credit history. As any student who wishes to live off-campus has found, a rental agency will check the student's credit score before allowing him or her to sign a lease—or they will require that the parents co-sign the lease.
Students will find that their credit history follows them after they leave college. It's important that students know this upfront, so they know that establishing good credit during the college years makes it easier to rent an apartment and qualify for loans after they leave school.
If you are a parent who's co-signed your child's card, make sure they know what that means for you. That not only are you financially responsible for any amounts due, but that your credit will also be impacted by any missed payments they make. And that even by co-signing, you've taken on additional debt, such that it may have a slightly negative effect on your debt-to-income ratio (DTI).
Communicating boundaries is key. If you find it inappropriate to review the credit statement yourself, at the very least ask your son or daughter to text you once they've made the monthly payment and put the payment due date in your own calendar as a reminder.