Navigating Credit Cards as a Student: Understanding Your Options
For college students or recent graduates, managing finances involves many components, with credit usage being basic to financial health. Like maintaining a healthy body, using credit and credit cards wisely puts you in good financial shape. If you’re a college student, you may not have a very long credit history, but you want to start building credit as soon as you can. Your credit history is reflected in your credit score. Think of a high credit score like a good grade - one with lasting benefits. With a strong credit score, you may be more likely to save money on auto loans, a mortgage, even car or homeowner’s insurance.
Understanding Credit Cards
Credit cards are payment systems that create a debt that you are then obligated to pay later. In the United States, credit card usage is widespread. But how do you get a credit card as a college student, or if you’re otherwise new to credit?
American Express and Students
It's important to note that there aren’t any American Express student credit cards. That’s because American Express typically requires good or excellent credit for all of its cards, and most students have no credit. Although American Express is a popular and prestigious brand, you can get all the features you need at this point in your credit career from a student Mastercard, Visa or Discover card.
Building and Maintaining Credit
Once you’ve started building credit, there are two important things to remember. First, the way credit scores are calculated, the utilization rate - the percentage of your maximum allowable spending that you spend at any one time - of your credit cards impacts your credit score. Second, focus on quality, not quantity, when you’re obtaining credit cards. Building a solid credit history and staying out of debt should be your primary goals, so focus on cards with low fee structures and rewards for your biggest expenses.
Budgeting and Financial Planning
It can be tough to budget when you’re a college student or a recent college graduate, because there are so many demands on your income. You’re juggling your housing, health insurance, payments on your student loans and credit cards, transportation, food, and utilities. However, try to carve out a regular percentage of your paycheck for savings and investing. It may be worth checking to see if converting your government-backed student loans to a private lender could result in a lower interest rate or lower monthly payments. For example, when the Federal Reserve raises its Federal Funds Rate, interest rates tend to increase. Once you have your debt obligations defined, you can make a budget. This type of planning may help you build credit and de-stress. One popular rule of thumb is to spend 50% of your income on necessities and 30% on your lifestyle, while using 20% of your income to pay down your debts, save, and invest. Some employers also offer matching contributions to employee savings; that’s a benefit to take advantage of, if you can. If you are a self-employed gig worker, look into a Solo 401(k) plan. In addition, you can consider an Individual Retirement Arrangement (IRA). Finally, don’t forget to invest in yourself beyond finances. Take care of your body physically by eating and sleeping well, and take care of your mental and spiritual health by connecting with friends and your community.
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Types of Credit Cards
When you’re considering getting a new credit card, you may notice that there are several different types-and how they work impacts how you can benefit from them. Some cards are designed to help users build credit, while others are intended to help maximize rewards. Some cards require a deposit, while others don’t.
Secured vs. Unsecured Credit Cards
Most credit cards are unsecured, meaning that they’re not backed by any collateral. Approval for unsecured credit cards depends on your creditworthiness, which is based on your history of paying debts on time, your credit utilization, the length of your credit history, the types of credit you’ve taken out in the past, and how recently you’ve had a new hard credit inquiry.
Secured credit cards are designed to help you build and establish your credit. They typically require a refundable deposit that serves as collateral. Like an unsecured credit card, you make regular payments to pay off the balance on your card. While you’re using your secured credit card, your deposit stays with your card provider.
Charge Cards vs. Revolving Credit Cards
With revolving credit cards, if you make a minimum payment, you’ll generally owe interest, so if you know you’ll be able to pay off your balance in full every month, you might consider a charge card. You can also avoid interest charges on revolving credit cards by paying your statement balance in full each month.
Rewards, Cash Back, and Travel Cards
People spend money in all sorts of ways, and some credit cards are tailored to different habits or categories, from travel to grocery shopping to dining out. Many credit cards are broadly referred to as rewards cards, meaning they earn points, miles, or cash back on your spending. You may want to earn rewards on everyday purchases, such as groceries, gas, or other general expenses. Alternatively, if you’re a frequent traveler, you may want a card that earns miles on airline purchases.
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Some credit cards offer cash back on your purchases, which you can, in turn, redeem as cash, statement credits toward your balance, or other rewards. Some may offer cash back at a flat rate, so you’ll earn a set percentage back on every purchase. Tiered-rate cards offer cash back based on specific spending categories, so you might earn a higher percentage back on gas or groceries, for instance.
If you’re someone who flies frequently (or wants to earn rewards to fly more frequently at a discount), then you might want to explore travel credit cards. Travel cards reward you with miles or points that you can redeem on air travel or hotels bookings. They may also offer other perks that make your travel experience smoother, like no foreign transaction fees, travel credits, or member status at certain airlines or hotel groups.
Business Credit Cards
Entrepreneurs and business owners have unique spending needs, such as tracking their business expenses and providing their employees with cards. Business card accounts may help them accomplish these goals.
Balance Transfer Cards
If you’re having trouble managing payments for multiple high-interest debts, a balance transfer card could help. Balance transfer cards may offer an initial 0% APR, so you can avoid interest for a set amount of time.
Choosing the Right Card
When you’re deciding on a credit card, you may want to think about your lifestyle and how you could make the most of your frequent expenses. For example, if you travel frequently, you might want a card that rewards you for your travel expenses and helps you earn discounts on future flights. Alternatively, you may want to think about your financial goals. If you have limited credit history and want to start establishing credit, a student credit card could be a suitable option for you. Or, if you’ve had some financial missteps and want to focus on reestablishing your credit, a secured credit card might check the boxes.
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From a financial management perspective, the four primary types are secured, unsecured, charge cards, and revolving credit cards. Some experts group credit cards by rewards, cash back, and travel cards. The card that best suits your needs may depend on several factors. For example, if you have a well-established credit history, you may look for a card with great rewards. Credit cards aren’t one-size-fits-all, so knowing the differences among the various options may help you choose the one that matches your goals.
Credit Cards for Teens
Discover the best types of credit cards for teens and how they can help your teenager build financial skills. Learning how to manage credit responsibly can help set teens up for a lifetime of sound financial management.
Teenagers under the age of 18 aren’t yet eligible to enter into a credit card agreement on their own. However, some card issuers allow minors under 18 to become authorized users on an existing credit card account. Older teens may be able to become primary cardholders, but they still might face certain restrictions until they turn 21. Credit card issuers want to know that applicants can repay the balance on an account before extending them a line of credit. If your older teenager doesn’t yet have an independent income, you can step in and co-sign on the credit card.
The decision of whether teens should have credit cards is a family-specific choice for parents and teens to make together. Adding a teen as an authorized user on a card can help them learn about responsible credit card use alongside you instead of on their own. You can help give your teenager a leg up by allowing them to establish a credit history at a younger age. If your teen regularly texts you asking for money while out with friends, it may be more convenient if they have a credit card on hand to make purchases.
If your teenager’s spending is left unchecked, they could rack up a significant balance on the account. Since authorized users are viewed the same as primary account holders from the perspective of credit reporting bureaus, any potentially damaging behaviors your child participates in could reflect negatively on your credit score. If your child has recurring bills, like a cell phone or subscription to a streaming service, you can let them manage and pay the monthly bills. After your child has been added as an authorized user for a few months or years, show them how to view their credit report for free.
There are several ways for college students to build credit, from reducing their student loan debt payments to applying for a student credit card. While some card issuers allow you to set an actual spending limit for authorized users, it’s also important to discuss a weekly or monthly spending limit with your teen. Not all credit cards are created equal. If your card has a high credit limit, you may consider applying for a new line of credit with a lower limit. A no annual fee credit card may be the best option for teenagers as they begin to manage money.
Adding a younger teenager as an authorized user to your credit card account may provide them an opportunity to learn about managing money with your support. As your teenager gets older, you may opt to become a co-signer to help them get their first credit card.
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