4 Keys to Using A Student Credit Card Properly Without Becoming Debt Bait
Money can be hard to come by when you’re in university, but is a student credit card the best way to manage your budget? And how do student credit cards work anyway?
Some Canadian banks offer credit cards specifically for students. They won’t offer you huge lines of credit, most student cards have a limit of around $500. There are two reasons why you won’t get a larger line of credit: 1) most students aren’t earning sufficient income to repay a higher debt load. 2) without a track record of successful repayment (credit history) banks feel uncomfortable lending out more than $500.
No matter the limit, credit card interest rates are expensive and student cards are no exception. Any credit card you choose should not be used for borrowing at this stage. That said, credit cards can help out in some other circumstances.
1. What are the advantages of a student credit card?
The use of a credit card will help you build your credit history. A good credit history will be helpful in the future when you want a higher credit limit, auto loan/lease, mortgage or any other type of debt. In fact your credit score is even being used by some insurance companies (home & auto depending on the province) to price your risk and landlords to determine whether you’ll pay your rent!
Canadian credit card issuers are becoming more conservative in their underwriting as the economic environment remains uncertain. Those with poor credit scores are finding it increasingly difficult to get a credit card. So starting a credit history when you’re a student can be a smart thing to do, if you plan on paying off your balance every month and not falling into the debt trap.
Another benefit of a student credit card, is the zero liability protection credit cards offer you. If you make an online purchase for example, and the merchant never delivers the goods, you will not be responsible for paying for the item.Moreover, if you use your credit card online, and someone steals your number and makes unauthorized charges, you will not be responsible for those charges and Visa, Mastercard or Amex’s Zero Liability policies.
Everyone wants to be rewarded for their loyalty nowadays and deservedly so. There are several student credit cards that offer rewards programs. Given your low spending habits, don’t use a student credit card with an annual fee. Also,participate in a rewards program that offers rewards that you can redeem for low point values and that you’ll like.
2. What are the key habits to success?
If you’re applying for a credit card for the first time, here are some habits that will be helpful:
Pay-off your balance in full each month. If you pay your balance off in full, you won’t be charged any interest. If you don’t, the cost of borrowing could be suffocating. BMO and Scotia charge students an interest rate of 19.99% while MBNA’s student card charges 18.99% – both rates will be painful if you carry a balance. If it helps, get in the habit of paying down your credit card weekly.
Don’t be late. Even if you’re a day late, if you do it more than once you’re interest rate can go up. Synch your minimum payment with your debit account so you don’t miss a payment and trigger an increase in your interest rate.
Don’t go over you’re credit limit. Oddly, some banks will allow you to go over your credit limit, but will then charge you a fee of up to $25, if you do so. Again,get in the habit of checking your balance owing weekly, so you know where you stand relative to your credit limit and avoid overextending yourself unexpectedly.
Don’t use your credit card to withdraw cash (cash advance). You may not know this but you can actually use your credit card to withdraw cash from the ATM, just like you use your debit card to do so – except a credit card will cost you a LOT more.
You will be charged a cash advance fee the greater of 1% or $7.50. So if you’re withdrawing$100 that’s actually a 7.5% charge, you don’t collect any points on cash advances and you typically pay a higher interest rate as well!
Even as a student, if you have a predictable income you may be able to get a standard card instead of a student card. This will give you a greater variety of credit cards to choose in the market.
4. Student credit card offers
Scotia, MBNA, and BMO amongst a few others, all offer credit cards specifically for students, with rewards programs as well. We like the Scotia Scene Visa card the most, because it’s a no fee card, offers an attractive rewards program with rewards (movie tickets, downloadable songs) that students can redeem for without having to spend huge sums of money on their cards, and you get the equivalent of 1.35% back in rewards per dollar spent. Compare that to the BMO SPC Cashback Student card where you only get .5% back and the value is clear.
Credit cards are not the most forgiving financial product. Pay your balance off in full to avoid onerous interest rates and avoid using your credit in a way that will cause you to pay those nasty, hidden, fees. Your student credit card is an opportunity to benefit from the convenience of a credit card, enjoy rewards points and build a strong credit history.