Should college students have credit cards?

By Unigo

When students head off to college and live on their own for the first time, it’s often tempting to arm them with a credit card. Parents may feel a sense of security knowing that their child has an emergency back-up if needed, but most students aren’t very savvy when it comes to handling credit cards. In fact, a recent study published in the International Journal of Business and Social Science (“Financial Literacy and Credit Cards: A Multi Campus Survey”) found that most students are pretty clueless about the debt they are racking up on revolving accounts. Believe it or not, over 70 percent of undergraduate students and 96 percent of graduate students have credit cards, but only 15 percent know what their interest rate is on those cards. Even worse, only 10 percent are paying off their balances each month. Add those unpaid balances (an average of $3,000 per student) to what the average student has in student loan debt, and it’s no wonder why so many college graduates are still living at home with their parents.

It wasn’t that long ago that credit card companies lured students into opening accounts in exchange for some free pizza or a t-shirt, making it all too easy for them to get in over their heads. Thankfully, banks must follow new regulations that are designed to help curb some of the overspending.  Unfortunately, some students are still making poor credit decisions. A simple solution may be to eliminate the ability for college students to secure credit cards, but is that realistic? Probably not. Instead, students need to educate themselves and understand that their spending (and paying) habits can have serious consequences for their credit scores. Here are just a few things students should consider before accepting any credit card offers:

1. Compare Rates

Students should take the time to shop around and look into annual percentage rates (APR) and fees. The best cards will have low interest rates, no annual fee(s), and may even offer some type of reward program. It’s also important that students only apply for one or two cards; submitting too many applications can adversely affect their credit scores.

2. Stay Within the Limit

Students should try to limit themselves to one or two credit cards at most. A good rule of thumb for students to follow is not to spend more than they can afford to pay in full each month, otherwise that $20 fast food meal could end up costing over $100.  Fees associated with "maxing out" the credit card's limit can add up quickly and ruin a student’s credit score, so staying under the limit is essential. Also, students should refrain from taking out cash advances on their cards, as this too can quickly add to their overall debt.

3. Pay on Time

Students should not expect their parents to pay their balance each month. Knowing when the bill is due, and paying it in full, will help students establish a healthy credit score and make them responsible for their spending habits.

Parents can help students by discussing expectations and setting spending limits prior to handing over their credit cards for use. Students should be aware of any fees associated with going over the limit or paying late, and the consequences of those actions. With a little education and planning, students can graduate without the extra burden of credit card debt, too.