Being a student usually means only having time for casual or part-time work hours. As such, funds can get a little tight sometimes. One way to bridge the money gap when cash is low is to use a student credit card.
Fortunately, there are credit cards specifically made for students. But if you’re wondering whether having one as a student is a good or bad idea, here are some pros and cons to think about.
What is a student credit card?
A student credit card is typically a no-thrills card with a low spending limit.
A no-thrills card doesn’t cost much. They generally have zero annual fees and low interest rates. Plus, spending limits start from as low as $500. These features make the cards best suited to students.
To be eligible for your own credit card, you must be at least 18 years of age. This is perfect for a University student. Yet, if you’re a high school student who hasn’t turned the big 1-8 yet, don’t despair. Provided you’re 16 or above, your parent or guardian can add you as an additional cardholder to their card.
Something else to note is that there’s an income requirement when applying for even the most basic student credit card. This threshold is low, though. Sometimes, you don’t need to prove a minimum income level, either. Instead, the financial provider will assess eligibility on a case-by-case basis.
What are the pros?
Build up your credit score
A credit score is one of the main factors that banks consider when it comes to lending money.
A simple way to start building your credit score is by having a low-limit credit card and showing you can make payments on time. This builds your credit score file.
Then, if you want to get a car or home loan in the next few years, you’ll be on your way. Lenders will see your credit history and use that information to assess your applications.
Enjoy free extra benefits
An iPhone has extra features on top of allowing you to make calls and surf the net. Similarly, many credit cards have extras too. For example, some provide zero foreign-transaction fees, which is handy if you like to travel overseas.
Cards also often come with purchase protection, entertainment discount memberships, and cashback offers. These extras mean you get more value out of your credit card.
Protection against fraudulent transactions
If someone makes a fraudulent purchase on your credit card, have peace of mind by knowing the transaction is covered by fraud protection. The bank or other provider will cover you for you the loss of funds on your credit card.
Also, remember that a thief’s transaction on your card ends up using the bank’s credit, as opposed to if it occurred on your debit card, using your savings account.
Make ends meet or spread payments on purchases
We all have times where our bank balances run low, and we have sudden expenses to take care of, like a car repair or extra text books. When this happens, having a credit card available can be a lifesaver.
A credit card is a handy backup to give you access to funds in emergencies. Plus, if you need to spread repayments on a larger purchase, like buying a new couch, the card can help with that.
Use it as a “buy now and pay later” tool if needed. Some cards run special offers where you can access 0% interest on purchase for a period of time.
What are the cons?
Rise in debt
Having a credit card can open the door building of debt, especially if you’re not careful with how you use it. Ask yourself how much self-control you have when shopping and otherwise spending.
Credit card debt is tough to pay back because interest rates are so high, especially in comparison to other banking lending products. If you have to take out a student loan for school, the last you probably want to do is add more financial pressure by racking up a heap of credit card debt.
Makes it easier to spend more
Buying something without having to pay for it now with actual cash can make it feel much easier to spend. Before you know it, you’ve lost track of your balance and get a big surprise when the monthly card statement arrives.
Avoid being caught off guard and getting into a spending spiral by keeping a close eye on your account. And remember: if you don’t have the money in your account to purchase something right now, you perhaps shouldn’t buy it.
Damage to your credit score
Using a credit card responsibly can improve your credit score. But, if you’re not careful with it, it can damage your credit score.
Being irresponsible by missing repayments or failing to pay back the monthly balance and letting debt build will negatively impact your score. In turn, this will reduce your chances of being approved for a home loan or other finance later.
Late payment fees and over-limit fees
Banks charge penalties when borrowers don’t follow through with their obligations. If you don’t make a monthly card payment on time, a late payment fee of up to $30 can be charged to your account.
Or, if your spending goes beyond your given limit, you might be charged a $10 or more fee.
Mismanaging a credit card can lead to you having to pay for many unnecessary expenses.
Helpful practices when using credit cards
Set up a direct payment.
Create a direct-debit payment option. This way, your monthly repayments get automatically paid from your debit account.
Doing this ensures you don’t miss card payments and have to deal with late payment fees.
Choose a reasonable credit limit
For many of us, the higher the limit, the greater tendency there is to spend.
Keep yourself in check by choosing a realistic card limit. Select a level you can comfortably pay off if you reach the limit. By the same token, though, you don’t want a limit that’s so low, you go over your allowance all the time, either.
Avoid using cash advances
It’s best to avoid cash advances unless you desperately have to use them.
Drawing cash from your credit card generates interest charges immediately, which many people don’t realise. The interest is charged daily until you pay back the drawn amount.
Plus, a cash advance fee is also charged on top, which is between 2% to 3% of the cash drawn amount.