Are you thinking about applying for a student credit card? Before you go and sign up that application, carefully weigh the pros and cons that can result from using a credit card. By doing so, you can be more aware about the steps that you can do to avoid getting yourself into trouble.
The Pros about Credit Cards for Students
Build early credit history. Applying for a credit card for students is the easiest way to build credit history. If you are a student, you have the privilege to get approved for an unsecured credit card without difficulty. Even with the new changes to the credit card law, it is still much easier for students to get their first credit card despite the absence of credit history.
Why is it important to build your personal credit history while in college? The sooner you start, the more impressive it will be to future creditors, insurers, and even to employers and landlords. The length of your credit history comprises 10% of your total FICO score so starting early can give you that significant advantage.
A good training to financial independence. Letting a young person handle a student credit card is an effective training on responsibility and debt management. Parents can play a big role in teaching their children about the proper use of credit cards. Indeed, teenagers need not get themselves stuck in bad credit to learn the consequences it can bring.
The Cons about Credit Card for Students
The risk of overspending. There is no denying that owning a credit card poses the risk of overspending. In fact, surveys show that a lot of teenage cardholders are guilty of such a bad habit. Splurges and unplanned purchases can quickly lead to a mountain of debt and bad credit. Therefore, students must learn how to exercise control over their credit cards.
Maximizing credit limit. Credit cards for students usually have lower borrowing limit compared to regular credit cards. While it is not necessarily a bad thing, some student credit card owners are prone to maximizing this limit. Such a habit can be damaging to your credit history. Why so?
One of the factors that determine your final credit score is your credit-to-debt ratio. Using up your available credit down to that last limit can pull down your score by as much as 10%. This is why financial consultants advice cardholders to keep their credit card use minimal- at least below 40% of their borrowing limit to protect their credit rating.
Increased amount of purchases. Students need to be aware that if they fail to pay their full balance on time, they will incur the additional interest rate cost in their bill. The interest rate can range anywhere from 14% to 20%, depending on the Issuer. While some student credit cards may offer 0% APR, that rate may only be applicable for 6 months or a bit longer. Afterwards, the regular interest rate will apply.
About the Author