For a college student not to have a credit card is as rare as seeing a student carrying a backpack full of books for their classes. Whether the reason is that banks want to teach young people how to responsibly handle credit early in life, or the goal is to get students hooked on credit cards before they have a job, the reality is student credit cards are a big business. That level of interest has credit card companies sweetening the perk pie to attract the most students. A recent survey by creditcard.com has some interesting takeaways about what banks are offering – and what students are going after – in regard to the available card benefits. Here are a few of the noteworthy points that should interest both parents and students about the current trends.
One of the killers for any credit card holder is the APR, or Annual Percentage Rate of interest the balance carries. If you pay off your balance within 25 days, the APR has zero relevance. But the survey showed that more students are carrying a balance, which means that the drain on a student’s future earnings will be greater over the long haul. While there are more choices of cards to choose from, the APRs have climbed higher over the past year. Because of the non-existent credit history of most students, that APR will fall into the 18.99 – 24.99 percent range. In simpler terms, for every $100 carried on a student’s balance, $19 – $25 a year will be added for interest.
Students may be able to sidestep the steep APRs for a year or so, if the company is offering a promotional grace period on the APR. That rate will be 0% for a year, then the normal APR, usually in the 18-25 percent range, will kick in. It is not unusual for people who take advantage of the promotional rate to come close to maxing out their balance, thinking they will drop it down close to zero before the promotional period ends. The reality is that usually doesn’t happen, and so not only will the student be paying interest on the remaining balance, but the APR will be dwindling any available balance fairly quickly. Some say it’s a trap, but others maintain it is a good way for students to learn how to handle credit with a minimum of risk.
Signup bonuses are common to attract students who fail to understand that a credit card is not cash, but a line of credit (debt). It’s not that signup bonuses are a bad thing, but offering cash to acquire debt seems a bit on the odd side. The cash offerings range from $25 to as much as $200 after being approved for the card. Some banks are attaching extra rewards points for signing up, which is close to the same thing as cash, but not quite. Still, the idea that getting off to a fast cash start is very appealing to students, and is a major reason for offering the upfront cash.
Speaking of cash, the most preferred benefit students take advantage of is the cashback rewards program. The reward usually is in the range of 1% – 1.5% for every dollar spent (or in real-world terms, $.01 – $.015 per dollar). Though this seems like a small amount, if left alone the cashback amount can pile up quickly. One drawback of the bonus rewards points programs is they are linked to the account holder’s total balance. So if you only have a total credit limit of $500, you only have half the opportunity of accumulating rewards points as someone who has a $1,000 credit limit. Just so you know, you can apply for a credit card and change your mind once you are accepted. Just don’t use the card and notify the company you are no longer interested in their offer. That allows you to apply for several cards and choose the one (or two) that offer the highest credit limits and the rewards program that best benefits you.
Specific to college students are perks that no one else will be eligible for. Discover offers a $20 a year credit for students who hold a 3.0-grade point average or higher at the end of the academic year. Deserve, a credit card not often heard of, offers a one-year subscription to Amazon Prime for just being a student, a value of $59 a year. There are also loyalty bonuses paid by Chase Bank, and a quarter of a percent bonus paid by Capital One for students who make their monthly payment on time. These are intended to be motivators to responsibly handle the bank’s money properly, which is a form of consumer debt education.
Earlier this year, wallethub.com had a different and more personal take on students who had credit card debt. They reported that 45% of students were more worried about their credit card debt than their student loan debt. That’s a scary statistic given all the media rancor about student loan debt. About 37% of students, either due to parental influence or personal choice, were on their parent’s credit card and avoided the whole student credit card decision – at least for the time being.
About 1 in 4 of college students opened a credit card account during their freshman year. The specific reasons weren’t cited, but likely choices were the ability to have some spending money in college and the fear of not having enough money to make ends meet during their first year. Altogether, for college students ages 18 – 20, the average (not median) non-mortgage debt was $6,963 per student.
- One statistic that both the credoitcards.com survey and the wallethub.com survey agree on is the student’s preference for benefits:
- The low-interest credit card is preferred by 31% of surveyed students (but it depends on how “low interest” is defined)
- Next in line at 21% was no annual fee (but as mentioned earlier, this can be trappy)
- Finally, the rewards program offerings, chosen by 18% of the students
So what should the student’s choice be based on? First, if you can get on your parent’s credit card, do it. The tendency is for student and parent to argue about spending, but like most things in life, there will be a middle ground reached (if both parties are reasonable). The next option is to find a student credit card with a low APR. In short, the lower the better, but don’t let your expectations get too high. Finally, there is the unthinkable choice of not getting a credit card at all. Despite the advice from debt managers, you can survive without a credit card while going to college, and start building your credit upon graduation. Statistically, that means you will have about $6,963 less to worry about.