Why Students Should Get a Credit Card
Conventional wisdom says that university students should stay away from credit cards. The belief is that young adults should not saddle themselves with high interest debt – which is absolutely true. But credit cards can be a valuable financial tool when used responsibly.
Whether you’re living at home or on campus, you might consider getting a student credit card. If you use your credit card responsibly, it can be an excellent way to build a credit history and establish a credit score at a young age. However, it’s important to be aware of the potential pitfalls of student credit cards – if you max out your credit card, regularly miss payments, or have zero income to repay the balance, it can damage your ability to qualify for loans for the years to come.
Student Credit Cards
Canada’s big banks and many smaller financial institutions offer student credit cards. These credit cards have similar features to standard credit cards, including cash-back or reward points. Since students typically lack a credit history they are often viewed by lenders as “high risk”. Because of this, student credit cards may come with higher interest rates and lower spending limits. Students are often bombarded with credit card offers on campus so it’s vital to take the time to carefully review the details before applying. Carefully review (and understand) the potential costs on the application.
With a lack of financial education in high school, credit cards can help teach students the importance of budgeting and using credit responsibly. As a parent, before your son or daughter receives a credit card, it’s important to sit them down and have a conversation about the benefits and pitfalls of credit. Make sure your child understands the basics of credit cards – they should only spend what they can afford to pay off in full each month.
As a parent, if your child is under 18 years old or lacks a credit history, you may be asked to co-sign. It’s advisable that you keep the credit limit low until you’re confident your son or daughter can handle their credit card responsibly. It’s important to carefully review your child’s credit card statement on a monthly basis to ensure they’re using it responsibly.
Some credit card issuers do not allow you to co-sign for student credit card applications. Instead you can add your son or daughter to your credit card as an authorized user. In this case it can make sense to take out a separate low-limit credit card. Although authorized users receive their very own credit card, it’s the parent who’s responsible for all activity on the account. It’s important to note that adding an authorized user to your account will not allow them to build a credit history.
Benefits of Student Credit Cards
Building a credit history at a young age is beneficial, as long as your child uses their credit card responsibly. Here are some of the benefits of student credit cards.
Credit Score: Building a good credit history is important, especially if you want to eventually borrow money to purchase a house or car. A student credit card can help create the foundation of a credit score to help qualify for a mortgage after graduation. However, if used irresponsibly it can take years to recover. Just like standard credit cards, you should aim to pay off your balance in full each month and keep your credit utilization below 35 per cent of your available credit.
Rewards: Just like standard credit cards, student credit cards typically come with rewards. You can choose between cards that offer points towards cash back, gift cards, and trips just to name a few. Some student credit cards also offer discounts at your favourite retailers.
Cash Flow: When you’re a student living on campus, your cash flow can be tight, especially if you’re waiting until your pay cheque comes in from your part-time job. Your student loan may not be enough to cover tuition, rent, food, textbooks, and transportation. It’s important to watch your balance carefully to ensure you can pay off any charges in full to avoid costly interest.
Consumer Protection: Student credit cards typically offer the same consumer protection as standard credit cards. If you’re making a major purchase like a new laptop, many credit cards offer extended warrantees at no extra charge. If you’re travelling during spring break, student credit cards also offer some insurance on rental cars and travel insurance.
The Bottom Line
As long as your son or daughter uses their credit card responsibly, a student credit card can be an excellent way to build credit. As a parent, it’s important to take the time to teach your teen or adult child about credit cards. Signing our Financial Responsibility Pledge is an excellent way to get commitment in writing to use credit cards responsibly. This will help make sure your teen or adult child is ready for a credit card when the time comes.