Student Credit Cards 101

If you're a college student, you probably already have a credit card. If not, you may have plans to get one or more soon. So why should you read on?

  • Because financial debt is one of the main reasons that many students end up dropping out of college.

  • Because your college years can be some of your most memorable-and some of your most costly. They don't, however, have to be the beginning of an adult life strapped with debt.

  • Although you may still feel in limbo between your teen years and adulthood, it's time to take charge of your finances and manage them as an adult. The sooner you do, the sooner you'll be able to start saving and spending your own money.

    For those new to credit cards and for others who know all about credit, let's go back to the basics.

    Why do credit card companies court college students?

    It's obvious by the friendly representatives who offer a free t-shirt or CD just for signing up in the student center. Or the applications slipped into bookstore bags. Or mail boxes crowded with card offers. Credit card companies want college students to carry their card.

    Did you ever stop to wonder why? One reason is loyalty-once a person has a card in their wallet, they are likely to keep that particular card and its upgrades for years to come. Another reason: college students are good customers.

    While this may seem ironic considering that most college students are without a steady source of income, Robert Manning, Ph.D., Professor in the College of Business at Rochester Institute of Technology and author of Credit Card Nation, says this is one example of how the credit card industry has changed radically in the past decade or so. "Previously, conservative rules deemed a good customer as one that paid their bills on time," he says. "Now, a good customer is one that can't repay their debt."

    "Credit is no longer an earned privilege," continues Dr. Manning. "It's now considered a social entitlement, and the screening criteria (for card applicants) is weak."

    Banks make money by charging annual fees, late payment penalties and interest fees on unpaid credit card balances. Therefore, card holders with revolving debt (those who do not pay their balances in full each month) are desirable. NellieMae.org illustrates this point beautifully through an example of a student with a credit card balance of $7,000 at an interest rate of 18.9%. If this student faithfully makes the minimum monthly payment of 3% or $25 - whichever is higher, and does not charge anything else to the account, it will take more than 16 years and $7,173 in interest fees to repay the bill!

    Additionally, Manning notes the banking industry has learned that college students will draw upon various sources of income to pay their debt-including student loans, money from part-time jobs, and as a last resort, many will ask a family member to supply the funds to get them out of debt.

    How to make credit work for you, not against you

    According to Nellie Mae, 81% of college freshman have at least one credit card. And for good reason. Credit cards enable online purchases-from text books to concert tickets, make it possible to rent a car, and help with medical emergencies or vehicle breakdowns. Used wisely, credit cards can be helpful throughout college, and can assist you in the development of financial management skills.

    As soon as you get your first credit card or loan, you have entered the world of credit reports and scores. A credit report is compiled by credit bureaus and contains information about your identity and credit relationships, among other things. Credit scoring is a system that lenders use to help determine your 'credit worthiness.' Credit scores are based upon your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt and the age of your accounts.

    It's vital to know that your credit score affects your ability to get loans, car loans, and home mortgages. Future jobs and insurance premiums can also be influenced by your credit score. By paying your bills in full or in a timely manner, a credit card will help you establish a good credit score. Late payment or no payment will help you earn a poor credit score. For more information on credit reports and scores and how they affect you, check out CardRatings.com.

    Developing a new view about credit

    Mary Ann Campbell, CFP, founder of MoneyMagic.com and a money educator, cites unrealistic expectations as a major reason for high student debt.

    Campbell, who teaches personal finance courses, says "Many students' expectations of their earning potential after college far exceeds what their actual income will be." She notes that some students use their credit cards with abandon during college, planning to pay off their debt when they land that great job after college. Indeed, some students forget that in order to get to the top of the career ladder, there are a few rungs, i.e., less paying jobs, they have to climb first. And the expense of starting a new job and life on your own can just add to existing debt.

    Manning's website, CreditCardNation.com, contains a great resource for students seeking a more realistic view of the first few years after college. Using the 'Budget Estimator,' a module designed by Manning, students can identify an average yearly or monthly starting salary for jobs in their particular major. The program automatically figures in estimates for taxes and social security payments. Students can then plug in expenses for housing, car payments, utilities, food, insurance, telephone and internet bills, clothing, credit card bills, student loan payments, and entertainment, etc. The module lets you know when you have spent more money than you make, and allows you to adjust payments as necessary until you get the hang of how your money is best distributed.

    Students that seem to have the most credit woes? Those who believe their standard of living during and after college should not vary from when they lived at home on their parents' income. Cable television, cell phones with cameras, and new cars become 'necessities' instead of nice extras.

    Advice to grow on

    When it comes to credit cards, students have great advice for other students. Heather, a college junior from Arkansas, recommends getting one card with a low limit. "This limits the amount of credit you have access to and therefore removes the temptation to spend more than you have or more than you can pay off immediately," she says.

    Another student recommends selectivity. "Don't sign up for a card that charges an annual fee to use it, and read the terms of the card before applying. You wouldn't believe how many people don't know what an APR rate is." For more information on finding the best rated cards, check out CardRatings.com. You can read reviews of cards from other students and get the lowdown on perks of various credit cards.

    Campbell has three recommendations for students: The first is open communication. Campbell says students who are educated about financial matters seem to have a better overall attitude regarding credit cards. Students should find a trusted source to talk openly with about money issues. Second, students should switch from spending behaviors (such as shopping) to activities that help you achieve the same feeling of gratification or reward, such as intramurals, exercise or campus organizations.

    Last, but certainly not least, enroll in a personal finance course as soon as your schedule allows. Says Campbell, "If it's not required coursework, take it as an elective. You will learn a set of life skills that will not only help you right now, but also after college and for the rest of your life."

    About The Author

    Rebecca Lindsey is a Senior Staff Writer for http://www.CardRatings.com. She began writing articles about consumer credit issues for http://www.CardRatings.com in September 2000.

    • More Resources

    Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting

    More Credit Information:

    Related Articles

    Make Sure Your Credit Report Is Correct to Improve Your Interest Rates And Lower Insurance Premiums
    Did you know that you could make sure to get the best rates on your auto and homeowners insurance simply by having a good credit score.Additionally a great credit score will allow you to get the best interest rates on your credit cards, car loans and even your home mortgage.
    The Ghost of Expected Surprises
    Here, Cratchet, what do you think you're doing?Uh, er, leaving sir.Leaving? It's 5 minutes to the hour.
    Choosing the Best Low Interest Credit Card
    With so many low interest credit cards on offer, how do you know which one to choose? Here is a brief guide for choosing your low interest credit card.The Chase Manhattan MasterCard is a great choice, for those with an excellent credit rating.
    Establishing Credit - What You Need To Know Part 2
    In my previous article "Establishing Credit - What You Need To Know Part 1" I discussed the need for a good credit history and what lenders were looking for prior to loaning an individual money or additional funds based on their credit history. This article will go into the necessary steps someone needs to take in order to initially establish their credit history.
    Secured Credit Cards- Consumer Tips
    Whether you have no credit or damaged credit, secured credit cards are a good tool for building a good credit history.Several months ago Tom, a member of CreditBoards.
    Searching For A Low Interest Credit Card?
    These days, people need to very carefully consider whattype of credit card they will carry in their wallets. Thereare so many options out there, and each individual hasdifferent needs.
    It Takes Credit To Build Credit
    Using a credit card wisely is an important step in building a good credit rating. If you're trying to re-build your credit or if you're young and just starting out, pay close attention the next time you receive a new card offer in the mail.
    What To Look For In A Credit Card
    When you are deciding what type of credit card to get it is important to compare credit cards to each other and find the best deal for you. There are a variety of different credit cards available, from low interest cards, cash back cards and even reward credit cards, it's hard to decide what exactly the best credit cards are.
    Credit Report - Watch Out for Parking Tickets
    The economic downturn of the last five years has affected millions of Americans, but it has also affected the budgets of states, cities and counties. With limited tax dollars with which to work, various government entities have had to try to stretch their budgets to allow them to continue to function.
    Some Truth About Credit
    Credit is currently and has been historically an integral component of our economy. Credit contribute a person's net worth, and financial power.
    Credit Counseling: Could it Work for Me?
    In the face of financial hardship, many seeking a responsible solution turn to credit counseling. Credit counseling is, all too often, the last stop before bankruptcy.
    Learn How to Improve Your Credit Score
    Having a damaging credit record can hurt you in many ways. It may prohibit you from making an important purchase such as a home, car, computer or vacation.
    What Are the Most Common Ways to Commit Identity Theft or Fraud?
    It's the number one source of consumer complaints at the Federal Trade Commission (FTC), and unfortunately, it's one of the simplest crimes to commit. Identity theft involves information from your daily life, from shopping, bill-paying, and even applying for a job.
    Recognizing the Signs that You Might Need Credit Counseling
    Most families in America today have a credit card; some have two or more. The type of credit card you own, gold, platinum, ext, is almost a status symbol in society.
    Useful Tips On Avoiding Credit and Charge Card Fraud
    Credit and charge card fraud costs cardholders and issuers hundreds of millions of dollars each year. While theft is the most obvious form of fraud, it can occur in other ways.
    The Credit Card Surprise That You Need to Look Out For
    Companies that issue credit cards want to make a profit. No one disagrees with that.
    How to Evaluate and Raise Your Credit Score
    Why do some people get offers for pre-approved credit cards and others don't? What do car dealers know about your financial health that you don't know? The answer is your credit score.Your credit score is a number generated by a mathematical formula to estimate how likely you are to pay your bills.
    Like It Or Not, You Have A Score To Settle!
    Like It Or Not, You Have A Score To Settle! (Part 1 of 2 on Credit Scoring)Just when most people finish with school and can stop worrying about test scores, there's a new kind of scoring that enters the picture. It's called credit scoring.
    How A Prepaid Debit Card Can Help You Rebuild Your Credit
    Consumers today are up to their eyeballs in debt. And many people don't realize it until their good credit has been devastated.
    Five Reasons to Repair Your Credit Score - You Can Do It Yourself
    There are multiple reasons that tell us why we should have a 700+ Credit Score, but these five facts will definitely give you the big picture and hopefully will drive you to want to fix your credit score starting today.Fact #1: Did you know that consumers with Credit Scores of 700+ are likely to get interest rates up to four points lower than those with scores under 640.