Are 'Student' Credit Cards Right for You?

By Christina Uss, UCLA

Student credit cards are big business. Nellie Mae reported that 76 percent of undergraduates in 2004 began the school year with credit cards, representing billions of dollars in annual spending power. Credit card companies court this profitable undergraduate market with student-specific cards, which are set apart not only by marketing techniques, but also by their credit terms and benefits.

No Income, No Problem

If you handle money intelligently, college can be the perfect time to sign up for your first credit card. Curtis Arnold, spokesperson for Citizens for Fair Credit Card Terms, Inc. and founder of CardRatings.com, says, "It's probably the easiest way to establish credit if you can use them responsibly. They're unique from the standpoint that they don't require you to have a job. No income, no credit record, no problem, you just have to be a student at a four-year university."

The on-campus credit card application tables have become a common sight in many student unions and bookstores. Credit card companies are eager to strike financial deals with colleges that allow them to set up tables filled with eye-catching free swag, luring students with a giveaway coffee mug or t-shirt to sign on the dotted line for a student card. Some states have passed laws discouraging credit card companies from targeting college campuses. Several companies have found success though direct mail campaigns and have abandoned setting up tables on campus. Also, more students are often getting their first cards while still in high school.

Why are companies willing to offer credit to students, a population with little to no income or credit history? For two reasons: first, most students tend to stay loyal to the card they get in college, continuing to use it for years after graduating. Second, students are surprisingly good customers. A study published in the Journal of Student Financial Aid in November 2004 found that 9 out of 10 college students pay their accounts on time. They also tend to carry balances, translating into lucrative finance charges for the credit card company.

Credit Card Terms & Benefits

Cardholders with little income, including college students, will be charged a higher interest rate to compensate for the higher risk of repayment. CardRatings.com, which provides objective ratings of credit cards for consumers, finds a low credit line and an interest rate in the mid-teens is reasonable for students. Arnold warns, "Avoid any rates in the 20s like the plague."

Kathy Witsil, senior VP of marketing at Chase, one of the largest credit card companies, says, "The more information we have about any customer, the better, so knowing you're a student helps us assign specific lending guidelines. The rates anyone gets really depend on their risk as a customer." If you have an established history of paying your bills on time and a source of income, you may qualify for a "regular" (i.e., non-student) card with more attractive rates.

Within the student card market, you'll find a variety of options, including reward cards that give users points to redeem for cash or goodies. Chase has partnered with retailers like Starbucks, Amazon, and the Gap to offer reward cards that let students redeem points quickly. CardRatings.com gives a high rating to a unique Citibank student card that rewards good grade point averages as well as on-time payments and staying within the credit limit.

However, for first-time card users, the reward component may be one more complication that entices them to spend without thinking. In order to learn the basics of charging and paying off monthly balances, stick with a plain-Jane card with the lowest interest rate you can get.

Staying Credit Healthy

Fundamentally, all student cards offer the same thing: a chance to establish a good credit rating. In order to help educate students and other consumers about responsible credit use, several credit card companies joined together to form Your Credit Card Companies, which provides online resources for consumers to learn about the credit industry, and works with the federal government to promote fair credit access.

Witsil notes Chase helps undergraduate customers learn to become credit-wise by providing budget and payment guidelines with the card, plus credit education tips in each monthly statement. Chase's online account access is a plus for students who can easily check balances, set up payment reminders, and schedule automatic payments.

Arnold, however, worries that even with education, the widespread availability of cards lets students slide down a slippery slope into more debt than they can handle.

"It's easy to say your monthly balances are only temporary, and figure 'I'm going to make big bucks when I graduate.' Then reality sinks in."

MORE INFO

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    * Only 21 percent of undergraduates with credit cards pay off all cards each month
    * The average outstanding balance on undergraduate credit cards was $2,169 in 2004, the lowest average balance reported since 1998