There’s a cliché that says that when it comes to personal finance, students live by the maxim: “act first, ask questions later (or not at all)”.
After using up their student loan and reaching the chilly outer limits of their overdraft, some consider the tempting plastic rectangles to unlock more wealth. After all, credit card lenders seem so keen to hand them out…
Short term borrowing is, indeed, one use for student credit card and, when they’re used in the right way, it’s a good one. Credit cards can also be useful to students as a form of extra insurance on certain purchases and for starting to build a good credit score.
Used in the wrong way, however, they can set off a whirlpool of interest charges that can lead to a dunk in the debt deep end. This guide should help to tell the difference.
Three good things:
Section 75
It sounds like an excuse the police would use to hit you over the head with a baton but Section 75 actually offers substantial protection for the cardholder.
It covers all purchases made using any credit card under law, providing that they are between £100 and £30,000 and enables the cardholder to legally claim back the full cost of goods or services that have not been supplied, or are faulty, from their credit card provider.
The classic examples are airlines that go bust, leaving you trapped abroad or with useless tickets, music festivals that never materialise and laptops that suddenly fizzle out examples for, coincidentally, sound fairly student-y.
Credit Building
A credit score is a prediction of your financial behavior made by lenders.
Scoring systems vary according to the particular lender but all are primarily interested in how stable the potential borrower is and how efficiently they’ve paid back any money previously lent to them.
Those who meet the required repayments on mobile phone contracts, overdrafts and loans look best in the eyes of lenders so taking out a credit card and meeting the monthly repayments improves a person’s credit score, making them a more attractive proposition when they go on to apply for other sources of credit, such as a mortgage.
Student discounts
Since students have discounts coming out of their ears in any case credit card providers’ attempts to entice them this was are largely ineffectual.
Still, try they do. Every now and then a good deal comes along but take promises of money-off with a big pinch of salt.
For example, RBS offer 10% off at hp.com. Sounds great except that laptops on HP.com will be significantly more expensive than HP laptops purchased elsewhere and, if you did want to buy direct, HP have student discounts available already.
Note that all these benefits are only benefits when cardholders make at least the minimum repayment every month and, preferably, pay off their credit card on time and in full within the interest-free period. Otherwise there’s the risk of…
The one big, bad thing:
Unmanageable debt
The average credit card APR at the moment is about 19% – you don’t need to be a maths whiz to realise that that’ll make even a small amount of borrowing add up fast.
Student credit cards don’t have long 0% promotional rates so they’re not suitable for longer term borrowing.
Using a student loan to pay off a credit card is not a good idea. Paying off debt with debt is a bad habit to get into and one that can have depressing consequences in later life.
Purchases have an interest-free period of about fifty days and, as many people forget, interest is only waived when you pay off in full, although paying off some is essential to meet the minimum monthly repayment.
If you’re borrowing using a credit card at the very, very least credit cardholders should make the minimum monthly repayment on the debt.
The most important, and most often overlooked, aspect of minimum monthly repayments is that they are usually a percentage of the card’s overall balance and don’t really do very much towards paying the card debt off.
As the balance falls, so does the minimum payment.
This makes clearing the debt take a long time. A really long time. A frequently bandied out example is that £3,000 borrowed at the age of 21 will not be paid off until the age of 50.
So don’t ever fall into the trap of thinking that the minimum payments are the ‘suggested payments’.
The higher that amount, the faster the debt will be paid off. Make sure that the amount is sustainable, however, as defaulting on payments will incur financial penalties that can destroy those on a tight budget.
This article was bought to you by Choose.net, a site that consumers can compare credit cards.