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Starting your journey in post-secondary education is an exciting time! It allows you to explore what you love and learn important skills, such as time and money management. During your first few days at school, you might receive several offers for student credit cards. So, should you sign up for one? If used correctly, a credit card can help you take charge of your financial future, however, if mis-managed, it can start a cycle of debt. Let’s look at the benefits and risks of getting a student credit card.
Benefits and Risks of Student Credit Cards
Like most things, student credit cards have advantages and disadvantages. Understanding how credit cards work will help you get the most out of your card while avoiding potential problems.
Why Do Companies Offer Students Credit Cards?
Companies know that students often have little income and no credit history, but they take the chance because they hope that students will stick with their brand later on. As a student, it’s usually easy to sign up and get approved for a lower max credit card.
Benefits of Student Credit Cards
If you use your credit card wisely, it can have several advantages, like helping you build a good credit score. But if you misuse it, you could face problems paying bills and damage your credit rating for a long time. Here are five great benefits of having a student credit card:
1. Student Promotions: These cards may come with an annual fee waiver or no fee if you open a student bank account with the same issuer. You might also receive perks, such as cash back or reward points for your purchases. These rewards can be beneficial if you use your card responsibly and pay off your balance in full each month.
2. Budgeting Tool: Using your credit card for regular expenses, like your phone bill, can help you keep track of what you’re spending.
3. Emergency Fund: You might not have room in your budget for unexpected expenses, like emergency car repair or extra costs at school. A credit card can help cover these costs when you’re unprepared.
4. Manage Living Expenses: Using a credit card for living expenses can be an effective money management tool. It lets you track all your expenses, as your monthly statement lists every transaction. Additionally, you can earn more rewards by using it consistently.
5. Build Your Credit History: Your credit history is important to future lenders, employers, and landlords. It lets them know whether you pay your bills on time. Each payment you make is reported to credit bureaus. Paying on time helps establish a good credit rating, opening doors to better financial opportunities in the future.
Understanding Your Credit Score
Your credit rating is a crucial aspect of using a credit card. Late or missed payments will negatively affect your credit report. A poor credit rating can hinder your ability to secure student loans, find rental housing, or obtain a job or home loan.
Tips to make sure you pay your credit card bill on time:
- Set up an automatic payment from your bank account to pay your bill in full three days before it’s due.
- Set up an automatic payment for the minimum payment three days before it’s due. However, paying only the minimum can lead to high interest charges and prolong the time it will take to pay off your balance. It’s always best to pay more than the minimum if you can.
- Transfer money from your bank account to your credit card each time you make a purchase.
Effectively managing your card will help you enjoy the benefits while avoiding possible problems.
Risks of Student Credit Cards
While credit cards offer advantages, they also have drawbacks. Acknowledging these pitfalls can help you avoid them. Here are five key points to consider:
1. High Interest Rates: Interest rates on student credit cards typically hover around 19.99% for purchases and 22.99% for cash advances. A purchase incurs interest only after a grace period, provided you pay your balance in full by the due date. In contrast, cash advances incur interest charges immediately at a higher rate.
2. Missing Payments: Missing or being late on a payment can trigger an increase in your interest rate on the outstanding balance. Higher interest rates make it more challenging to repay your debt.
3. Overspending: Having a credit card may lead you to believe you have more money than you do. A credit card is actually a type of loan that you must repay. The payments may leave you short on cash, potentially trapping you in a cycle of debt.
4. Increased Student Debt: Your credit card balance adds to your existing debt, along with costs you already may have, such as student fees and financing.
5. Poor Credit Rating: Failing to make payments or missing them can hurt your credit score. Reestablishing a good credit score could take several years.
Should You Get a Student Credit Card?
Deciding whether to get a credit card is a personal choice. While there are benefits to using one wisely, mismanagement can lead to long-term problems. If you decide to get a credit card, manage it carefully. Know how much you can pay back, keep track of your payment due dates, interest rates, and how much credit you’re using to avoid overspending.
If you want to avoid debt but need a credit card, consider a prepaid card instead. You load the card with the money you want to spend, so you avoid going into debt or paying high interest fees. However, you typically can’t use a prepaid card to build your credit history.
If you have a student credit card and are having problems making your payments, it’s essential to take action to resolve the problem.
Where to get Debt Help
Our team of Licensed Insolvency Trustees at Allan Marshall and Associates are debt solutions experts. If you have student debt that you can’t repay, please contact us online or call us at 1-888-371-8900 to schedule a free appointment. We offer credit counselling, Consumer Proposals and Bankruptcy as debt relief solutions. We’ll work with you to get you back on track and put your financial worries behind you.
