College is a time of new experiences and responsibilities. One thing many students look forward to is having their very first college credit cards.
By understanding the merits and pitfalls of having a debit/credit card in college, you shield yourself from the potential financial harm while, at the same time, enjoy the college life with some line of credit to finance your necessities and hobbies.
Building Your Credit Score
Credit scores have gone from optional to a necessity in today’s credit-driven consumer market. College students will need this three-digit number to finance a car, house, business, and other financial endeavors they decide to pursue later on. By starting at a younger age, college students have more time to build their credit score.
Lower Interest Rates
Having enough time to build your credit score and learn how to handle finances can also translate to lower interest rates paid on your loans and lines of credit. Those whose score is below 620 will have a difficult time getting approved for a bank loan. Even if they do get approved, the APR, annual percentage rate, will be devastatingly higher than if you had a good score. In fact, according to a FICO chart, loan applicants with a 760 credit score will only be charged an APR Of 3.1 percent compared to the 4.7 percent charged for loan applicants at the 620 score level.
Young people don’t just learn how to handle their finances responsibly by reading it from a book or getting told nonstop by their elders. College students must learn how to budget their expenses based on their allowed credit limit per month. They are forced to juggle housing, food, and other miscellaneous expenses or face the humiliation of not having any of these necessities. Credit cards are an effective tool for teaching college students about money management since the effects are immediately felt.
Possibility of Bad Credit Score
A bad credit score can take some time to repair. If you fail to make payments on time and defaults on loans, your credit score can be irreparably damaged thus limiting the major financial decisions you can make.
Bad Money Habits Affecting Main Card Holder
Most college students who manage to get a credit card are only extensions of their parent’s credit line. This means they have a joint account sharing the limits and balances of the said credit line. This means failure to pay your credit card on time will affect the main cardholder, which is most likely your parent.
Temptations to Spend More
Without a credit card lining their back pocket or wallet, college students are forced to make due with whatever cash they have in hand. With a credit card, college students take bolder purchases because they can, at least on paper. Rather than save up enough money for an out-of-town trip, that latest smartphone model, or concert tickets, college students opt to finance it immediately with their credit card, a habit that can be financially crippling in the long run.
There you have it: the pros and cons of credit and debit cards for college students. For parents, give it a test run by opening an extension line of credit for your kid with a significantly lower credit card limit. If they can make payments consistently, only then should you consider giving them a wider leeway.
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