Student credit cards are geared especially for young adults who want to start using credit. Many students want to get a student credit card and benefit from having one. But it wasn’t too long ago, 2009 and before to be exact, that credit card vendors would set up booths all over college campuses and aggressively compete for the chance to get students to apply for their card. Sometimes they offered a free T-shirt or some other prize to get students to fill out the application. Credit card vendors were trying to gain long-term or even life long customers. The trouble was, many students were unsophisticated about credit cards and wound up in financial trouble.
The Credit CARD Act of 2009, which went into effect in February 2010, set up rules to protect all consumers, and it included provisions for young people and college kids, making it more difficult to get a student credit card.The CARD Act made it illegal for credit card vendors to issue a card to anyone younger than 21 unless that person had a cosigner or could show proof that he or she could afford to pay back debt. Vendors also could no longer offer goods in exchange for filling out an application. If students are educated and understand how a credit card works, it can be a useful financial tool for them.
Because student cards are designed for students, they often have different terms than standard credit cards do. Many student card issuers approve student credit cards with no credit or if students have just a limited credit history, which applies to practically all students. Many students are establishing credit for the first time with a student credit card. This makes them a higher risk because credit issuers have no way of knowing whether the student will pay back what he or she charges.
When banks take on a higher risk, they typically pass on that risk to consumers in the form of charging them a higher annual percentage rate. Once students develop a credit history by paying back their credit card bills on time for about a year, they can ask the credit card issuer to lower the interest rate, or they can apply for a regular credit card that offers a lower rate.
Another way student credit card issuers minimize their risk is to offer a lower limit, something like between$250 and $1,000. That way, if the student defaults on the loan, the bank won’t be out too much money. If students stay under their credit limit and pay their bills on time, typically for six months to a year, they might be eligible for a credit increase.
Students usually have lots of expenses at college. Although credit cards are not the best vehicle for paying for tuition, they are useful for small purchases such as gas or an occasional pizza. If students start using their student credit card for small purchases that they can pay off each month and on time, they establish a good credit record, which can serve them well after graduation.
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