I am going to make a massive generalisation here and say that students should not have credit cards.
I personally believe that at the age of leaving school and heading into university, people just are not mature enough to recognise the difference between needs and wants. It is also a time where the costs of living tend to outweigh the money coming in, making credit cards an easy temptation to use. What happens is a quick out-of-control spiral into debt which has massive implications on your future.
The reason I feel I am able to make judgement on students and credit cards is because I have been there. It all started when my friend recommended a Credit Card specifically aimed at students which had a low limit of $750. This quickly became maxed out and I looked at other banks and what they offered.
I was soon offered a $20,000 limit credit card even though I barely made that amount in a year whilst I was studying. I ended up in masses of debt which I was unable to get out of alone. It is only now that I am 10 years out of school and having learnt about how credit cards work (and an added dose of maturity) that I realise how lucky I am to be rid of it all. I now refuse to have a credit card because I just believe they are a recipe for disaster.
Student credit cards
Many of the banks are now catering for students by having a specialised credit card targeted for tertiary students. You are usually required to be an Australian citizen, over 18 and studying full time at a reputable education provider. You may also be required to have a savings account at the same institution and you may have to have a parent or guardian co-sign on the card. It may help also to have some kind of employment. The most common feature of benefit to students is the fact there is on most of the cards no annual fee.
Advantages of student credit cards
There are some advantages of students having credit cards which are mainly centred on establishing good financial management practices. It also can help found a good credit rating which has the potential to affect future lending. This is vital for items such as applying for a home loan or car loan. It can also be helpful for use in emergencies such as if you urgently needed to purchase a textbook but had no cash funds on you at that time.
Normally the credit limits will be fairly low to prevent you overspending beyond your repayment capabilities, but make sure if you are aware of how much you can afford to repay.
Disadvantages of student credit cards
Generally student credit cards have higher interest rates than regular credit cards which can be a major drawback. This is especially the case if say you do run into trouble with repayments. Having a high interest rate will mean the balance owing can quickly become out of control. Once you start missing payments this is going to start having a negative impact on your credit score which is going to affect your future. Not only will it be harder to get an application for a mortgage approved, it may also mean you are given higher interest rates.
Mainly though having the card just offers too much of a temptation to spend the money on non-necessities. It is all too easy to go on a shopping spree or pick up the latest gadget with that piece of plastic. Impulse buying is especially a problem at this age because of your new found freedom.
No longer are you being monitored by your parents which can make some people go out of control.
Tips you should keep in mind if you apply for a student credit card
Tip 1: Know the features of the credit card
Most people do not understand the ins and outs of credit cards which is the biggest problem in them getting into debt. Find out about the card, what interest rates mean, what fees and charges there are, what does it mean to make minimum repayments etc. Make sure you thoroughly read the Product Disclosure Statement before signing up.
Tip 2: Only use your student credit card for emergencies
You also need to set yourself some boundaries with the card. It should not be used for buying clothes willy nilly. You should be making sure it is only there for emergencies. To make sure you don’t overspend on it set a lower credit limit on the card but be sure to not go over this amount as this could cause more fees to be charged.
Tip 3: Make your repayments always on time
The important thing you need to do is if you use the card, make sure you keep up with the repayments in a timely manner. If you can show you manage your money wisely, this will allow you to build a good credit rating.
Tip 4: Make a budget for your credit card and overall finances
Make sure you establish a budget not just for the credit card but for all of your finances. Not only does this help you establish good money practices that can be utilised throughout your life, it will also help you understand how much money you need and have to use. This should ensure that you are less likely to get into trouble on your credit card if you are aware of what you can afford to repay.
Tip 5: Have a savings fund set aside
You shouldn’t be solely relying on the credit card for emergencies. You should be as much as possible trying to pay for things out of your own pocket. For this reason you should be establishing a savings fund which will also help you establish good money behaviour.
Realising that you can’t have everything now, will mean you learn the value of saving for a goal. Having the savings fund also means that if you do overspend on your credit card, you have some money you can use to pay it off which will help you prevent getting into more debt.
One of the most important things to remember is that a credit card is not your money- it is the bank’s money. Also remember that banks are there to make money so be wary about this.