Student Debt and Credit Education Blog

Building a solid credit history as a student is more important than ever if you plan on taking out a loan in the future for a car, house, or even to rent an apartment. Making small purchases with a student credit card and paying them off each month is one of the best ways to build your credit while in school.

I won’t argue that credit cards are for everyone. Those with poor impulse control or who are unwilling to educate themselves should steer clear. But since most students don’t know much about credit cards, this article is intended to provide a balanced or at least different perspective for parents and students to help them make a more informed decision about credit cards.

The Good

Credit cards aren’t really all that complicated, the devil as they say is in the details. A credit card company extends to you an amount of credit, or money they will loan you to purchase things. You then have a certain number of days, usually around 20 to pay that money back or they begin to charge you interest on the money borrowed. If you borrow money and pay it back in less than 20 days it’s like a free loan. A responsible borrower can use this time to their advantage in a number of ways such as advancing or evening out their paychecks and keeping better track of monthly expenses.

If a person is responsible with their use of the credit card, the credit card provider will report good things about you to the credit agencies who compile credit reports and that will build a good credit score. Because of this reporting feature a credit card is one of the fastest and easiest ways to build solid credit.

People mistakenly think simply paying their rent, medical and utility bills on time helps build credit. This is generally false because they only report late payments, not on time payments so they can only hurt you. Good credit makes sure you get the best rates on credit cards and loans for school, autos, homes and more. For those who say “always use cash instead of credit”, it will take a lot of cash to buy a house if you never build up your credit.

Some cards have a yearly fee in return for a lower interest rate but plenty have no fee. Some cards give you rewards for each dollar you borrow such as points redeemable for merchandise, cash or airline miles. This can really add up and even make you money like with gas credit cards. For many people credit cards are profitable and important financial instruments not to mention critical in an emergency away from home. Credit cards can be just this simple; unfortunately most of us get them without learning the rules or getting any type of education about credit and credit cards.

The Bad

Since there is no formal credit or credit card training for students, they often do enter into credit card agreements uneducated and unprepared. Just like a student with a car but no driver training, accidents are more likely if not unavoidable. Credit card accidents cause you to experience the serious credit card pitfalls.

The biggest pitfall is that if you borrow a lot and take a long time to pay it back, it will cost you an unbelievable amount by the time it’s paid back. Credit card companies encourage customers to pay back as little as possible (i.e. minimum payments) to ensure they make money on interest for as long as possible.

Students underestimate how quickly balances and interest can compound. Before they know it they can be burdened with a large monthly payment which can be hard to manage. The interest charges make it very hard to pay off a large balance once it gets out of hand. The difficulty in managing this scenario makes it easy to make mistakes and that’s when the real fun begins.

The Ugly

Adding insult to injury is the fact that credit card companies wield a gigantic axe for all who step out of line. While it may be understandable that they need to make money on interest, there are some very nasty tricks they use to make even more money in the form of fees and huge interest rate hikes. For the smallest mistakes like paying a day late or charging even a dollar more than your credit limit they have full power to penalize you in really unfair ways.

Even worse is that they report your mistakes to the credit reporting agencies who then lower your credit score. Other credit card companies you may work with may see the newly lowered score and can then penalize you as well even if you didn’t make the mistake with them!

If you had a high balance, suddenly the interest rates go up, the payments become unmanageable resulting in more late fees and it snowballs on and on. This is the truly dangerous aspect to credit cards. Many groups are pushing congress to reign in some of these unfair practices but right now education is the best defense.

Risk vs. Reward

Credit cards used responsibly have important benefits. We live in a credit based society and cash is increasingly inconvenient. However, credit cards also have significant consequences for irresponsible handling. It begs the question why our society requires sex education, drug awareness education and driver education for students but does not require or offer credit education. Sex, drugs, cars and credit cards all offer serious pitfalls for students and have huge consequences for irresponsible behavior.

The subject of students and credit cards is far more complex than credit cards are bad or credit card companies prey on students. Think of text book companies who sell books at outrageous prices, buy them back at a fraction then resell them at slightly less outrageous prices. Since textbooks are a required tool for completing college and colleges take their piece of the action, doesn’t it make that whole scheme seem just as sinister?

We live in a capitalistic society and everything has its cost but that doesn’t mean you avoid it, in fact you can’t because those same things have their benefits too. The more the benefit, the more the cost and credit cards are no different. The best you can do is to understand risks vs. rewards for things so that you can maximize rewards while minimizing risk.

So Why Get a Student Credit Card?

If you’ve followed the logic this far you’re probably in agreement with me that students need to be educated about responsible credit management.  What we could debate is how that happens. Shielding a student from credit cards and then releasing them into the wild as graduates is no guarantee that the outcome will be any different; in fact it could be worse.

Sure students may be more mature later on as graduates and working adults. However they will suddenly be bombarded with financial offers and have access to a wider selection of credit cards with higher limits, bad terms and more potential danger. With no prior experience the risks are significantly higher.

The advantage of a student credit card is that it allows the student to build credit, learn about credit cards and cover emergencies away from home all while having a credit limit which is generally under $2,500 for a new student.

By keeping the credit limit low a student limits the amount of damage they can do while gaining all the benefits of experience. Additionally student credit cards allow a person with a limited credit history to obtain them and start to build good credit. Without this history all loans and credit cards they try to get as a graduate will be at a much higher rate and will cost them a lot more.

NOTE: This article is based upon my perspective of course and I welcome yours. If you agree, disagree or just want to say hello, please feel free to comment. If you are a ScholarshipPoints member, thank for reading. You can earn 15 points by using the following code at www.ScholarshipPoints.com: BIGBADAXE

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