Getting access to credit can be a challenge for students.
Many students are in their teens or early 20s and usually go to university or college straight from school. And as they’re studying full time, they’re probably not in paid employment.
In other words, they’re still too young to have any history of borrowing (apart from their student loan), and that means they’ll probably have a low credit score.
Lenders such as banks and credit card providers use a person’s credit score to work out whether they want that individual as a customer - and having a low score means you either won’t be offered a card or will only be offered one with a high rate of interest.
It’s therefore worth considering if a dedicated student credit card could be the best option.
What are student credit cards?
Student credit cards usually have a low credit limit so that you can’t get into too much debt. Typically, this will be between £500 and £1,500.
The amount of interest charged is usually higher than for mainstream cards. And as a general rule of thumb, the higher the credit limit, the higher the interest charged on the outstanding balance if it is not paid off.
If you can manage to clear your balance in full within the interest-free period each month, your student credit card can help you to strengthen your credit rating. You should also avoid exceeding your credit limit.
If you can’t pay off what you owe in full, make sure you pay off at least the minimum. Never miss making a payment.
This sort of strong financial discipline will give future lenders more confidence that you will be a good customer.
Five credit card golden rules
If you do decide to get a credit card while you’re a student, follow these five golden credit card rules to make sure you don’t get caught out.
1. Pay the balance off in full each month
If you can afford to, it’s best to pay off your balance in full every month to avoid being charged interest. If you start paying interest, the cost of borrowing can get very expensive.
2. Never miss a repayment
If you can’t afford to pay off the balance in full each month, you must make at least the minimum monthly repayment on your credit card, preferably more. Consider setting up a monthly direct debit for this amount, so you always pay on time.
If you can’t do this, you’ll need to call up your lender and discuss a repayment plan. If you do miss a payment, you’ll typically be charged a late payment fee of around £12. What’s more, it could leave a mark on your credit file for three years and this could affect your likelihood of getting credit in the future.
3. Build up your credit rating
Paying off your balance in full each month and never missing a repayment is the perfect way to prove to lenders that you’re reliable when it comes to paying back debt. This will be useful in the future, when it comes to applying for more credit, for example a mortgage or loan.
4. Never use your credit card to withdraw cash
You can use a credit card to withdraw cash from an ATM in the same way you can with a debit card, but it can be very expensive.
First, with a credit card you’ll be charged a withdrawal fee of 3% or thereabouts.
Secondly, cash withdrawals often attract a higher rate of interest than purchases – and you’ll be charged interest from the moment you withdraw your cash.
5. Enjoy purchase protection
One of the biggest benefits of having a credit card is that it offers automatic consumer protection on purchases.
This means that if your item is faulty, never turns up or the company goes bust before they deliver it, you can claim a refund from your credit card provider. It applies to purchases that cost between £100 and £30,000, even if you just put a deposit on the card.