By AMANDA ABELLA
Getting started with credit early can be advantageous if you want to build a healthy financial future. Many college students could benefit from those four years of using credit responsibly, and student credit cards can be a great option for those just starting out on their credit journey.
Here are three tips to consider as you hunt for the best student credit card for your needs.
1. Shop around for the lowest interest rates available.
When shopping around for a student credit card, make sure to compare interest rates so you don't end up paying for more than you have to.
Unfortunately, student credit cards typically have higher interest rates than standard credit cards. This is because young people often either have no credit score -- or a very short credit history -- and are seen as higher risk borrowers.
According to a 2014 Magnify Money study, a student new to credit would likely qualify for a card with an average annual percentage rate (APR) of 21.4 percent.
And a high interest rate on student credit cards can be very costly. According to the Credit Karma Debt Repayment Calculator, if you charge $1000 on a credit card with an APR of 21.4 percent and only make a minimum payment of $25 a month, you'll end up paying an additional $767 in interest over a course of 71 months (almost six years). This is assuming you don't add to the balance, which can significantly affect your debt repayment.
Of course, the interest rate you end up with typically depends on your individual experience. If your parents added you as an authorized user on one of their cards when you were younger, you could have a more robust credit history than the ordinary student, so you may qualify for a lower APR.
2. Be wary of fees.
It's not just the interest rate you have to worry about when it comes to credit cards -- you also should consider fees. Some fees to look out for include:
- Annual fees
Credit cards usually charge annual fees to help cover the cost of the benefits they offer. For example, many travel rewards cards that come with annual fees offer free checked bags, travel points and upgrades. These are great perks that can save you money on flights, baggage fees, car rentals and more.
However, many student credit cards don't offer substantial rewards in part because the credit card providers are taking on a higher level of risk by lending to consumers who typically don't have established credit histories.
While some providers now offer student credit card benefits like cash back rewards for good grades, it's important to weigh the potential rewards against any fees that may be attached.
Some student credit cards may advertise "no annual fee," but it's really only for the first year - then an annual fee kicks in. You may want to find a card that has no annual fee at all. To check, look for the fees listed in the credit card agreement or ask the card provider to send you a list of all the fees.
- Late payment fees
Late payment fees typically range from $25 to $35 -- however, some student credit cards may give you leeway if you accidentally miss one payment. But be warned: Late payment fees will typically apply to any further missed payments.
- Overlimit fees
Fortunately overlimit fees (a fee you're charged if your balance exceeds your credit limit) have become practically non-existent thanks to the CARD Act, but you should still keep your eyes peeled just in case. Prior to the CARD act, credit card issuers could process transactions even if they exceeded your credit limit, and then charge a fee for that transaction. According to the Consumer Financial Protection Bureau, that fee was typically $39.
3. Know your limit.
Is your student credit card going to be your first ever card? If so, it can be helpful to look at your student credit card as your training wheels for managing credit.
One way to ensure that you build credit and avoid overspending is to find a student credit card with a low limit. In other words, if all you need is a credit limit of $500 and you're at risk for overspending, you may not want to get a card with a $3,000 credit limit.
Because payment history and credit utilization are big components of your overall credit score, it may be better to pay off a card with a lower limit in full than to run the risk of overspending and adding interest to your balance because of a higher credit limit. Once you get more comfortable managing credit then you can request a credit limit increase.
There are several different kinds of student credit cards on the market, which can make the process of finding a good one difficult -- but use the tips above to help you make the right decision when shopping. Check out our in-depth reviews to find the best student credit card for you.
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