Credit 101 for College Students

Jason Oxman

September 3, 2014 – Across the nation, college students are ready to take on the world – or at least live outside the family home for the first time. The newfound freedom is invigorating, but it comes with significant personal responsibility. Not taught in the classroom – and thus an important lesson for parents to teach – is how to maintain control over personal finances.   It all starts with credit, debit and pre-paid cards – and understanding the differences among them.

Finding the right card for you is one of the best ways to manage your money. While making your selection, it’s important to make well-informed decisions.

Let’s talk first about credit cards.  One of the many advantages of having a credit card is that it can have a positive effect on your credit score when you use it wisely. By using a credit card regularly and making your monthly payments on time, you can build a solid credit history. With a higher credit score, you may qualify for low-interest rates on mortgages, car loans and other big-ticket items down the road, which could save you money.

Along with creating and sticking to a budget, having a credit card will help you better understand your expenses. You can log-in to your credit card statement and review a detailed list of your purchases. And of course, credit cards are safe and secure, providing zero liability from fraud.

There are some important points to consider when selecting a credit card. Does the card have an annual fee? What’s the interest rate on monthly payments (if any), and are there late fees? Does the card offer rewards? Depending on your card, you can earn a variety of rewards, including cash back on everyday purchases, including gas, groceries and airline miles that can be redeemed for trips or travel discounts.

If you’re under 21 or don’t have a regular source of income, you’ll need a co-signer. Your co-signer (usually a parent) will agree to be liable for your debts.

If you don’t have a co-signer, there are still good options available.

You could choose a “secured card.” A secured credit card is a credit card account where the issuing bank requires the customer to make a deposit, typically equal to the credit limit of the card. It is common for a secured credit card to charge a 100% security deposit, meaning you have to put down $500 to get a $500 spending limit. Assuming you pay your monthly bill on time and do not go over your spending limit, you will get your money back, in most cases, after one year of good credit behavior. Make sure you read the terms and conditions to find out how large a security deposit you have to make, to ensure that the money you put down is truly a refundable “security deposit,” and that you know how fees will be assessed. Also make sure to choose secured cards that send reports to a credit agency: having your fiscal discipline and hard work toward building credit recognized by the credit bureaus is important.

Prepaid or debit cards are another great alternative and offer a simple way for students to manage their money.  If you tend to overspend or would like to control your spending, then prepaid or debit cards could be a good card for you.

For a student who may not wish to open a bank account, a reloadable pre-paid is a great option.  Unlike cash, prepaid cards can be replaced if lost or stolen.  In addition, having a prepaid card allows a student access to e-commerce sites that they might otherwise be unable to use.  Finally, a prepaid card allows you to only spend up to the amount you have deposited into the account and therefore this makes overspending impossible. Make sure to read the service agreement before you choose a card – and pick the card that charges a low or no fee for features that are important to you.

Lastly, debit cards serve a number of purposes and are a smart choice for college students. You can use the card online, in-store, or to withdraw money. They’re convenient and safe, a big step above cash. They’re a gateway into savings and retirement accounts, loans and more. They’ll teach you how to use plastic without going into debt and they’re a glimpse into the banking system. If you forgo physical banking services, you can easily find free or even rewards checking accounts. If you choose an account that doesn’t have any ATMs nearby or doesn’t refund the fees, you may pay out-of-network ATM fees to your bank, as well as surcharges to the ATM owner.

A card – whether credit, secured, prepaid or debit – is a first step toward financial security, independence and upward mobility. When well researched and used wisely, they’re always a great choice for students.

Jason Oxman is CEO of the Electronic Transactions Association (ETA).