Student Credit Cards

How They Work

Some of these accounts, particularly those issued to high school students, may be secured with money deposited in the account ahead of time to cover purchases. These cards are also known as prepaid credit cards and the limit is usually around $500. However, no matter what amount is deposited, that is the spending limit. If you manage your account responsibly, many companies will be willing to bump you up to an unsecured credit card after the first year of usage.

Other student cards operate like a unsecured credit card where the cardholder borrows from the company for purchases, and then makes a monthly payment to the company to cover the purchases. These cards also have a charge limit, but as you make payments, the amount of those payments is restored to your available credit, minus any interest charged.

Approval Standards

Student credit cards generally have less stringent requirements for approval than a standard unsecured credit card.

• Current employment is not always required, although this may vary depending on the company to which you apply.
• Some student cards are an extension of a parent's credit account.
• Student charge cards may be issued to customers with a thin to non-existent credit history. This same situation could cause your application for a standard credit card to be rejected.

Why the relaxed standards? Credit card lenders want to cultivate new customers and hopefully build brand loyalty. These lenders are willing to take the initial risk with the hope that a new cardholder will turn out to be a life-long customer.

Offers Vary on Student Credit Cards

Not all credit cards for students are created equal. Here are a few things to be aware of before you settle on one in particular.

• Annual percentage rates may vary on unsecured cards. Look for a card that offers a zero percent interest rate or as close to it as you can get, because every interest point adds a little bit more to the total on your monthly billing statement.
• Annual memberships fees vary. Some cards do not charge this fee, but others do, and the amount can very greatly from one card to the next. Since this will ultimately cost you more money, you want to get a card with the lowest annual fee possible.
• Credit limits are generally set low for a new account, but may be raised if you make at least your minimum payment on time every month. Be careful not to view higher limit cards as necessarily better than cards with lower limits. Instead, try to base your selection on an amount that is actually closer to your needs, rather than your wants.
• Check the late fees and interest rate penalties. You may think you'll never miss a payment, but it happens to the best of us. Some companies have severe late fees on a single payment, then automatically increase the APR, while others may be a bit more forgiving to first time users.

As you can see, there are a lot of variables, so try to find the best overall package available to you.

Application Considerations

Do the Research

It's a very sound idea to spend some time researching and comparing various student credit card offers before you begin applying. Every time you apply for credit, it's recorded on your credit report, and too many applications will lower your overall credit score. It doesn't matter if your applications are accepted or rejected, companies looking at your report in the future are wary of individuals who apply for a lot of credit, and you could lose out on future opportunities if you aren't careful. By doing some comparison shopping at home, you can weed out those cards with less appealing offers, enabling you to limit your inquiries.

Your next step is to call these companies directly and find out if their offers are good for students enrolled in a two-year degree program or if they are reserved strictly for students enrolled in a four-year degree program. Not every credit card company makes that distinction, but it can matter, and you don't want to waste one of your applications needlessly.

Apply to One Company at a Time

Once you've narrowed you choices to maybe three student credit cards then it's time to begin applying, but don't rush in head first. Apply to your first choice and hold off on the other offers. If you're accepted by the first credit card company, you should have enough credit to begin the process. The fact that your only application was approved should do wonders for establishing a good credit score.

If you do fail to get approved on this first card, then it's a good idea to contact the company you applied to and ask why you were turned down. This could help you learn what needs to be rectified in your credit history or application info before you risk a second or third application. Students are not generally expected to have much on their credit records, but even so, a lack of credit can sometimes count against you as much as a bad credit mark.

Summary

For the best results, start with a secured credit card to get used to spending within your limits. If you're ready to move to an unsecured card with a low credit limit, opt for a card with an APR that is no higher than approximately fifteen percent, but even lower if you can manage it. If you limit spending to the essentials, remain within your credit limit, and make the minimum payments on time every month, you will be well on your way to establishing good credit, and a life-long habit of financial responsibility.

External Links

High school and college students can expand their financial knowledge and understanding of credit through MoneySkill, a highly interactive, reality-based Internet curriculum. The American Financial Services Association's Education Foundation designed this free service to educate students to make informed financial decisions.