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Key Points:
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Student credit cards target younger populations with limited (or no) credit history and let borrowers build a baseline score.
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These credit cards come with perks like cash-back rewards to cover emergencies or as an alternative to cash.
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Diligent budgeting and a realistic look at your finances are important before starting your financial journey.
Nearly 20% of Americans have limited or no credit history. Many people lack credit history or recent activity or have none at all. As more transactions use credit, a good credit score is vital for significant purchases like homes and cars.
A student credit card is a tool to help you on a financial journey
That leaves a key demographic in a precarious position: only 66% of Gen Z are “credit active,” meaning they have a credit history to lean on in the future. Much of that population skews older, too, and younger members often find themselves lost and unable to lock down basic credit products to begin building a profile.
That’s where the purpose of student credit cards comes in. These cards are tailor-made for this uncredited population and offer unique benefits beyond just building baseline credit. Student credit cards carry risks like any other credit card. This means that education and discipline are crucial factors to consider.
What is a Credit Card for Students?
A student credit card definition is simple. It’s much like a standard credit card, with a key distinction. Credit cards usually require at least some credit history, even if a low credit score will likely come bundled with lower limits and a higher interest rate. But many students face a dilemma: having lived at home before going to college, they probably didn't have a chance to build credit independently.
For those in a younger age bracket, 18 – 24, the average credit score is 679. The average for adults 41 – 56 is a solid 705. Length of credit history is a key driver of credit scoring, and limited credit history means a low score.
However, student credit cards negate this distinction and specifically seek to close that gap by offering a revolving credit account to students with limited credit history. Since student credit cards have lower barriers to entry than car loans or personal loans, they're a great entry point for students to build credit while offering the benefits and flexibility of a credit card.
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How Does a Student Credit Card Work?
Student credit cards have lower credit limits, easier approval criteria, and tailored features such as rewards for good grades, no annual fees, and educational resources about credit.
Students can build a positive credit history by using a credit card responsibly. This includes making budgeted purchases and paying the balance in full every month. It's crucial for their future financial goals.
Student Credit Card Requirements
You must prove enrollment in an approved educational institution to qualify for a student credit card. This is usually done by sending the credit card company a tuition statement or enrolling through your school email. You'll also need a social security number, so foreign exchange students aren't usually eligible for student credit cards offered by US institutions.
Sometimes, you'll need a co-signer to qualify for a student credit card. A co-signer vouches for your ability to repay the card. If you default on student credit card payments, the co-signer is on the hook to cover your payments.
Sometimes, you'll also need proof of income to be eligible for a student credit card. This is more common for those with a poor credit history or student credit card applicants under 21. If you don't have a part-time job generating some income, you’ll need a co-signer to help secure the card.
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Key Credit Card Benefits for Students
The primary benefit to owning a student credit card is that you can quickly begin building a credit file. Starting your credit journey early is paramount to long-term financial success, particularly as you enter the workforce and begin shopping for mortgages or car loans. Additionally, since student credit card issuers understand that their customers don’t often have a ton of cash incoming (beyond part time work), student credit cards are often fee-free.
But these credit cards have many additional benefits, although some vary depending on which card you select.
Credit Card Rewards and Perks
Many credit cards offer unique rewards and perks. Credit cards for students are no different. Depending on your card, you may be eligible for cash back on purchases, rewards points to use for travel and shopping, and member-only deals and discounts. When deciding between different student credit cards, finding those with rewards and perks aligned with your lifestyle is a key differentiating factor between the many options available.
Credit Cards Cover Emergencies
Healthy emergency savings are at the top of the priority list when developing your financial roadmap. But, sometimes, you can't withdraw cash quickly enough to cover an emergency event like tow truck costs after breaking down, emergency flights home, or even paying for textbooks before your student loan or scholarship money disburses. Furthermore, many companies won't even take cash anymore – making a credit card the perfect emergency stopgap. But make sure you can use your emergency savings to cover your new credit card balance!
Credit Cards are a Safe Alternative to Cash
If your wallet or purse gets lost or stolen, you can do little to recover the stack of cash inside. However, these credit cards have a robust fraud and theft department that can help nullify any unapproved transactions. Ultimately, carrying around plastic rather than cash is safer for your financial bottom line.
Risks and Drawbacks of a Student Credit Card
Student credit cards usually have drawbacks for students not fitting the specific user profile these companies target. Student credit cards typically have low credit limits and high-interest rates to protect the credit card company against overspending risk. If you're an older student entering college after time in the workforce, are a graduate student, or attend night school on top of a full-time day job and have the credit history to support it, you're better off getting a standard credit card.
If you’ve decided that a student credit card is the best course of action, navigating a credit-building journey can be hazardous if you lack the right tools and knowledge. The first step to safely take advantage of a student credit card is to build a budget, understand how credit works, and dive into the student credit card’s terms and conditions. Potential overspending, underpayment, and steep interest payments can quickly make a student credit card a losing proposition. Before pulling the trigger, you should:
- Build a budget – how much cash do you have coming in and out? How can you increase your income, like developing a side hustle or finding part-time work? The greater your income, the better terms you'll likely get on a student credit card and the less risk of defaulting.
- Explore the many types of cards available to see what fits your lifestyle preferences and which offers the best terms.
- See the student credit card's repayment terms, i.e., expected payment date, interest rate, late fees, etc. Then, match them to your budget to ensure you aren't falling into an unsustainable borrowing cycle.
Bottom Line
Student credit cards are a unique proposition today, where creditworthiness often matters more than net worth. And, as more consumers rack up credit card debt, issuing companies are stricter with minimum income requirements and credit scoring. This makes building a financial credit base difficult for students striking out on their own. Student credit cards serve as a bridge between living at home (rent-free, as it were) and entering the "real world" with all that entails from a financial perspective.
But just because you get a student credit card doesn’t mean you can (or should) begin leveraging its full benefits. The rules of prudent financial management and budgeting still apply. Remember, a student credit card is a tool to help you on a financial journey – not a goal in and of itself.
FAQ
Can a student credit card help build credit?
Yes – student credit cards are one of the easiest ways to build credit by proving you're responsible and can manage spending while paying debt on time. Be careful because student credit cards come with the same risks and penalties if you miss payments or default.
What other ways can I build credit without a student credit card?
If you aren’t comfortable with a student credit card, you can explore secured credit card options, get added as an authorized user to an adult’s credit card, or see if your landlord is enrolled in a credit-building rent program (usually called rent reporting services).
Can I keep my student credit card after I graduate?
Some credit card companies let you transition a student credit card to a new standard account, while some may terminate the card and make you reapply for a new non-student credit card. This is one of many questions to ask your potential card issuer before applying.
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Jeremy is a finance and investment writer who works with stock research platforms, wealth managers, and investment funds to deliver value to clients and customers. He couples his lifelong interest in financial topics with an MBA from the University of California - Davis, and loves breaking down complex topics to educate new and experienced investors alike. He lives in Austin, TX with his wife and young son.
