Credit Cards for Students - An Essential Guide

How does a credit card work? You've heard that credit cards are both helpful and damaging, but why? Or maybe you want to build up your credit score, but have no idea how to do it? Well, we have all the answers, especially for students and young professionals... The first question to ask is:

Why do you want a credit card?

a) You want to build up your credit score
b) You need money If it's (a) then this article will help you to understand the complexities of credit cards, and what to be careful of. However, if you are considering a credit card for its borrowing capabilities (b), as a student, this is a very risky move; you have no stable income, and there are other safer options for you to explore (see below for alternatives).

Why should you get a credit card?

Spending through a credit card offers more payment protection than debit cards, according to Section 75 of the Consumer Credit Act. If a purchase is therefore lost, stolen or damaged, and a supplier is refusing fault, you can claim a refund through your credit card provider. Said protection applies to purchases over £100, but under £30k. Using a credit card also helps to build up your credit score, based on your credit history. Your credit score is an indicator of your reputation with money. As a student or young professional, your score will probably be low or non-existent, as you haven't got much proof of financial responsibility to your name. Of course, a credit score is not the only evidence used by, say, a mortgage company, but having a good score behind your name, even as early as right now, will put you in very good stead for the future. However, you have to keep up with re-payments for this tactic to be fruitful.

Where can you check your credit score?

For a free credit score assessment and report, head to Noddle - this will give you a rough estimation of your reputation. If you'd prefer a more comprehensive credit report, you can use a paid service, such as Experian.

How does it work?

A credit card account essentially consists of:

• A credit limit (the maximum you can borrow )
• An APR (Annual Percentage Rate - the percentage of interest you pay on outstanding balances ) - the average is about 16% for non-students.
• An interest free period (the maximum time you have to borrow and repay for 'free' ) - the average is 56 days, but for students it will be about 1 month.
• A minimum monthly repayment (the minimum you must repay each month )

The best advice we can offer is to always wipe your balance clear each month. If you have no debt on your card, you won't be charged interest; in effect you've borrowed for free by returning the money within the interest-free time period. Therefore, if you can't afford it, don't buy it with your credit card. By incurring interest, you will end up repaying far more than you borrowed, and the credit card becomes inefficient - and your debt could spiral out of control. Another word of advice: be wary of your balance month-to-month. Typically, lenders will look at your spending habits, and as an unofficial benchmark, keeping your balance under 50% is responsible use (e.g. only spending up to £500 per month if your limit is £1000). An example of irresponsible use would be spending your entire credit limit, and only repaying 20% of it - or even worse - the minimum payment. Also, do not withdraw cash using your credit card. You will be charged unnecessary interest, while your debit account lets you do so completely free of charge. As your credit score improves, you will have access to larger credit limits, and longer duration of interest-free borrowing. But you have to earn this trust from the provider, by buying the occasional purchase with your credit card, and paying it off as soon as possible.

Which one should I get?

As a student with little or no income, you're in a minority of credit card account holders, so your options are fewer. However, there are some providers that accept students. To find a list of cards that you could be applicable for, head to this handy credit card checker - the type of card you need depends on your current credit status, so not all students are the same. Young professionals, often with lower salaries, will also need to start from 'the bottom' and earn better credit. But as long as you stick to clearing your monthly balance, and never spend more than you can afford to repay, your credit will quickly improve.

Do not forget:

• Credit cards are not forgiving. You need to spend and re-pay with caution. If you miss repayment deadlines, you will be penalised, and charged heaps of interest that you probably can't afford.
• Pay off your balance each month to avoid extra costs. This is your chance to build a credit score that will help you in the future; do not mess up this chance.

What are the alternatives?

If you're strapped for cash, please do not even consider using a credit card or a Payday Loan; the interest rates are ridiculously high, so you will have to pay back way more than you initially borrowed. Plus, if you can't meet the repayments, your credit score will plummet, potentially dampening your chances of future borrowing Instead, try and extend your student overdraft, or switch to a different student account that offers a better value overdraft. As student overdrafts are interest free, and for a year (or more) after you graduate, this is the easiest and most cost-effective way of borrowing as a student. If you've already maxed out your overdraft, speak to your family or friends who would be in a better position to lend you some money. But be warned: borrowing from people you know puts a lot of pressure on your relationship, and unless you set out (and stick to) realistic repayment options, it could result in a big ball of resentment and guilt.

A Summary of the 3 Golden Rules:

If you've decided to get a credit card, do not forget these golden rules...

• Clear your balance each month
• Don't spend more than 50% of your limit
• Don't withdraw cash