Many issuers advertise student credit cards with perks and add-ons such as attractive rates, student discounts, long grace periods, and no annual fee. While having a credit card can serve as a safety net in case of emergency, there are some downsides to consider before you apply.
Obviously, one problem is that many young people are new to credit and are prone to major financial mistakes – maxed out cards, missed and late payments, etc. Lack of financial knowledge means that students hardly know anything about pre-determined spending limits, interest rates, and interest-free periods. Many are caught off-guard and are unable to cover the minimum payment.
This results in penalty charges and interest, which are quite hefty, and blemishes on your credit score. This can prevent you from making major financial moves such as starting a new business, buying a home or vehicle, home renovation project, and so on. The reason is that your credit score will be affected, and issuers will be unwilling to offer a low-interest loan.
Having a credit card makes it easier to overspend if you don’t have healthy financial habits. This often leads to a spiral of debt, with students being forced to work hard to repay the balance. This may have a negative effect on your academic career, performance, and future. Many students are left with substantial balance to repay while in school, often resulting in poor marks. What is worse, damaged credit may lower or ruin your chances of getting a job. Today, employers often run a credit check before making a decision. Not only this, but reports show that many students amass more than $2,000 in credit card debt before they graduate. Other reports show that 1/5 of college students carry huge outstanding balances of over $6,000 – $7,000. Given that many of them also apply for student loans, this often results in a combined debt of over $30,000 by the time they graduate. Missed and late payments only make the problem worse. And unlike government-sponsored loans, payments are due on a monthly basis, with no forgiveness, forbearance, or deferment.
Finally, some student credit cards come with hefty interest fees compared to standard cards (see a list of student credit cards here). If you need to use a card, you may want to check with smaller lenders, credit unions, and your local bank (if you are already a customer). Ask if they offer promotional rates and periods as well.
There are some pros of having a student credit card, one being that it helps students with good financial knowledge to build credit and borrow toward buying a vehicle, real estate, and other big-ticket items. Little or no credit exposure can be as bad as tarnished or poor credit (see here). Another benefit is that it is easier to track your spending and where money is going if you use your card to make payments. You can check your monthly statements to look at and modify your spending habits. Besides, having a credit card can help if you need urgent cash and is a better alternative to payday loans with hefty charges and excessive interest. Finally, using a credit card helps teach financial lessons, and young people learn how to handle money and credit (sometimes the hard way). The bottom line is – a student credit card is a good option only if you already know how to budget, plan, and live within your means to avoid major financial blunders. A student credit card also means overpaying on college expenses and higher student-related costs.