There is a school of thought that some students shouldn’t get credit cards or that they aren’t ready to handle that responsibility. The truth is that credit cards can be an important part of increasing a student’s financial knowledge, credit skills and providing some personal finance flexibility. But this is a real-world training ground, so the trick is to use that student credit card wisely — and to pick the right card.
The right tool for the right job
Credit cards are a great tool in your personal finance toolkit. If used properly they can make your student life more convenient, help build your credit rating, and even let you enjoy some free perks and rewards (such as tickets to the movies).
But tools are meant to be used the right way. You’d never use a saw to tighten a loose doorknob, or a pair of pliers to hang up a picture. The wrong tool will cause you more problems than when you started.
Credit cards are exactly the same. Don’t think of them as free money that you can use in place of a chequing or savings account. Everything you purchase with your card will have to be paid off, potentially with (a lot of) additional interest if you don’t use the card correctly.
Using credit cards without understanding how they work (or what penalties you could receive) is a big mistake. That’s the financial equivalent of missing the nail and hitting your thumb with the hammer. Luckily, students can quickly learn how to avoid credit card mishaps and minimize rookie mistakes.
Making the credit card honour roll
Your student credit card should have two important things:
- No annual fee
- A low interest rate under 12%
Notice how that list doesn’t include a novelty sign-on bonus?
Watch out for the oldest trick in the student credit card book. Some credit card companies will entice you by offering free schwag at a campus booth on the first week of classes. You’ll see offers for “free” university t-shirts, a box of cookies or a similar deal sweetener. That’s not to say those cards might not meet the first two criteria, but this little “prize” shouldn’t be part of your credit card decision calculus — and neither should a chic card design.
Because a student credit card is usually the first credit card experience for most young adults, it’s best to keep the training wheels on for a little while. It can be tempting to make purchases right away, but give yourself a little room for first-time wobbles and errors.
By making sure your credit card has no annual fee and a low interest rate, it can really help limit the financial debt. If you decide to teach yourself credit card lessons “the hard way” by racking up the credit card bill, you could turn that potentially helpful tool against you.
Pay off your balance
There will be plenty of time for fancy credit cards that have more enticing sign-up bonuses and perk packages. Those cards can have major advantages, but generally are better once you start earning an income that allows a bit more monthly spending.
As a student, the goal should be to get the convenience of a credit card and to build a credit rating as wisely as possible. This means not forking over any hard-earned summer job money just for the privilege of using a credit card. It also means limiting the amount of interest fees you will owe if you can’t pay off your full credit card balance at the end of the month.
Money can be tight throughout the school year — requiring a budget of $11,000 and up. If you don’t have extra money saved, sometimes students will spend a little more than they can afford by using their credit card.
That’s okay — IF you can pay off the balance when your credit card statement arrives. By paying off your balance each month, you will entirely avoid paying any interest charges. It’s simple math…$0 x 12% = $0. With a zero balance, your interest will also be zero.
At the very least, if you can’t pay off the entire balance then make sure you make the minimum payment, even in cash-strapped times of the year. This little tip will save you ongoing interest charges. In fact, it’s so important that you should set a calendar reminder to make that minimum payment every month.
If you have any balance left on your credit card, you will need to pay the credit card interest on the amount. For example, if you have a statement balance of $150 and you pay off $30, you’ll be left with a balance of $120. You’ll be charged interest on that $120 — and next month you’ll start by owing $120 plus the interest.
That’s where the math works against you.
If you don’t pay more of your balance in this example, then by the second month you’ll owe more than when you started. This doesn’t include any other fees that may be associated to your card like Over Limit and Late Payment fees.
To minimize the interest charges, a low interest rate on your credit card is so important. That rate will determine how much interest you’ll have to pay on your credit card balance.
Rewards, perks and insurance
Credit cards may also come with additional rewards and perks — usually based on how much you purchase with your card.
When selecting a credit card, as long as the credit card meets the first two prerequisites (no annual fee and a low interest rate), then feel free to choose whatever rewards fit you best. Some students prefer a blanket 1% cash back offer, while others like the idea of free movie tickets.
Think about how you’ll be using your card and what rewards will work to your advantage. For example, most students won’t be spending thousands of dollars on their credit card and consequently, won’t rack up big enough balances to take full advantage of a 1% cash back reward.
One bonus that isn’t as obvious is the extra insurance that a credit card can provide. Some cards offer built-in insurance on purchases you make with your card, mobile phone purchases and extended warranty guarantees. These are neat little perks that are worth considering when choosing a card.
At the end of the day, credit cards can be powerful tools that come in a very small package. As you begin to assemble good financial habits, keep things simple as you build your credit rating. You’ll have plenty of other new experiences to focus on as a post-secondary student, and calculating how much a high interest rate is going to cost you shouldn’t be one of them — no matter how cool the free t-shirt is.
With the ACU Collabria Student Visa* Card you can build credit with no annual fee and your purchases are protected with an extended warranty. Apply today.