This post may contain affiliate links. Read my disclosure for more info
A new tool recently added to Financially Mint: Student guides. These guides will be explained in easy to understand human words and will cover the most important parts of certain finance topics: a nice combination of ‘WTF is …’ and ‘Now how do I do it?’. Detailed and in-depth: a great resource.
Aaaand our first student guide is on: credit cards.
I’ve met way too many students who have no idea what credit cards do and how to use them. Worse, I’ve met a few that have suffered the consequences: falling into bad debt. And the financial entities love to keep it that way, simply because bad debt = more money in the banks’ pockets = happy banks. Yes, the banks prey on the ignorant, which is why it’s so important to understand what the credit card shebang is all about.
The structure of this guide will be as follows:
1- What is a credit card?
2- Benefits of using credit cards
3- How student can take advantage of them
4- Steps to acquire your first credit card
5-How to improve your credit score
Let’s get started!
WTF is a credit card?
Put simply, a credit card is a piece of plastic (looks just like a debit card) that you use to buy stuff. On a debit card, you use your money saved in your bank. On a credit card, this is borrowed bank money. The bank kindly (or not) lends you money every month, you use it, and then you pay it back at the end of the month. Sounds pretty nice? It is, until you don’t pay it back at the end of the month. If you don’t, the bank starts charging interest and next time you’re able to pay back the borrowed money you have to pay some additional ‘fee’ = interest and charges. This is usually a percentage and accumulates over time. This is how banks make their money and that’s why they want you to get into debt. Not so kind anymore.
Different credit cards have different limits you can borrow. As a student, the limits are pretty low since we don’t have regular incomes and one month can vary a lot from the other (as in ‘will I be able to eat this month?’). In the UK, student credit cards limits are usually around £500 a month.
So now you understand what is a credit card. But what does all the weird lingo on the application mean?
APR (Annual Percentage Rate): This is the percentage of interest we were talking about before. Say your credit card has a limit of £500 and the APR is 22%. That month you eat too many sausage rolls and only pay back £400. The rest of the £100 you have to pay at an interest of 22%, which means you’ll have to pay back £122 instead of £100. Bit painful.
Minimum Payment: This is the minimum you need to pay every month in order to not get charged additional fees. It will be calculated every month including the interest and the amount you owe. If you don’t make the minimum payment you’ll have to pay extra and it could affect your credit score negatively (see below).
Credit Score: It’s a bit like a personal money score: how well can we trust you with money? (very Black Mirror!). If you’re someone who fails to pay back their credit card in full or is constantly in debt, you’ll have a low credit score. If you’re good at paying back, you’re considered a trusted member of society and this can highly benefit you in the future. More on this later.
Annual fee: Just as it says, an annual fee is an additional fee you pay simply for using the credit card. It’s a specific amount and just gets charged to your account. Another way for the banks to make some £££.
Interest-free: Banks love to attract people with the big words ‘interest-free’. It varies between ‘0% interest’ and ‘interest-free’ but just means that for a certain period, 6 months or 1 year, you won’t have to pay interest on the money you owe. Suddenly those £100 don’t budge and you just have to pay back £100, until the 0% period ends.
Additional charges: More charges = more money for banks. You’ll find more charges when transferring from one credit card to another, withdrawing from an ATM and even more ‘penalty fees’ when not paying back the full amount at the end of the month. Suddenly those £122 become £150: and that, my friends, is how you accumulate debt.
Benefits of using credit cards
Although I may have painted credit cards as pure evil, there are some benefits to using those little pieces of plastic. The first thing to consider however, is that you use the credit card wisely and only overspend if absolutely necessary. Got it? Now onto the benefits.
- Improving your credit score/rating
You can use a credit card solely for the purpose of improving your credit score. Why do you want a good credit score? Because this is the score that banks use to see if you’re trustworthy enough to handle loaned money. A high credit score means personal loans, mortgages, car loans and more credit cards. If you’re good at paying back your credit cards, you’re more likely to get a mortgage or a car loan in the future. See below for other ways to improve your credit score.
This one is pretty important. If you spend more than £100 on a credit card on a specific item (TV, laptop, etc), you can earn ‘protection’ from the bank or credit card company if it breaks down or turns out to be faulty. This can mean a refund or a replacement of the purchased item.
If you choose a good credit card you can earn rewards and cashback on them. The rewards range from travel miles (a big thing in the US) to discounts in a shop. Cashback means you literally get your money back on specific purchases (usually this is like 1% but still).
Credit cards are great financial practice when used correctly. The practice teaches you the importance of budgeting and keeping track of your money. You also get a feel of how banks work and what is most important to them (steady income, credit score, etc). You’re also learning the dangers of debt and how easily it accumulates. And remember that you’re in college: if you make a mistake, learn from it, correct it, and don’t make it again. The world won’t come falling down (unless we’re running out of beer).
How students can take advantage of credit cards
Normal credit cards often require a person to have a stable salary, a permanent residence and credit card history, which makes it hard for students. However, there are still options out there and getting started soon means building a good credit score early on.
Banks and other companies may also offer something called a ‘student credit card’, which means credit cards for people just starting out or who qualify as a student. In the UK you need to have a ‘Student Bank Account’ with your bank before you can apply for the credit card.
Student credit cards usually have no annual fees and have some pretty cool rewards (cinema, travel, etc), although high interest rates (but we’re only getting them to pay back in full, right?!). You won’t have a very large amount to start with each month (usually around £500), but eventually you’ll get to switch to a normal credit card and take advantage of those benefits.
But you don’t always need to get a student credit card from a bank, you can also get them from different shops and companies, which is why it’s always good to do a bit of research. Check the Resources down below for more info.
Steps to acquire your first credit card
Check the resources down below, do some Google searching, see what your bank offers.
Look out for good rewards or cashback, and even the 0% interest just in case you ‘make a rookie mistake’ and pay back a day late. .
2- Check your credit score
If this is your first credit card then you most likely won’t have a credit score (unless your parents put you on their credit card or you’ve taken out a loan before). You can use platforms like Equifax or Experian to find out your score. You’ll pay a small fee and see your entire credit history (totally Black Mirror).
After doing your research and seeing what credit card you’re eligible for, you can actually apply. The steps will be on the bank’s or company’s website, and will likely include sending certain documents by post.
4- Understand the WHY
If you’re credit card is denied (happened to me), try and find out why. Here are some possible reasons:
- You’ve got a high personal loan (this does NOT include student loans)
- You’re not paying back your other credit cards in full
- You’re applying to too many credit cards and loans
- Delinquencies! Crimes!
- You’re income is too low
- You have too many credit cards
- You have a short credit history (most students)
- Unstable work history (annoying to students, again)
Do some hustling. Ask the company/bank why you got denied and how you could increase your chances of getting approved. Annoy them until they give you an answer, coz you’ll soon find out they don’t like giving those out too much.
5- Use your credit card WISELY
Credit cards are not an easy-access loan. This means that as a student, you should only buy stuff you can afford. In the UK you can do the direct debit trick: set up a direct debit from your debit current account to your credit card and automatically pay the full balance every month. But make sure the debit account is always full!
- Never withdraw credit card cash from an ATM
- Avoid transferring money
- Don’t spend more than the limit
- Just start with one credit card
Check the credit card terms carefully and make sure you follow each step carefully. This piece of plastic is simply a tool to educate yourself more financially and gain rewards for the future. Although I am a supporter of Money Experiments, I recommend staying away from debt as it causes more problems than solutions.
How to improve your credit score
As explained before, a high credit score means it’ll be easier to get a mortgage or a loan in the future. This can always be helpful and it’s not too hard to achieve, and getting started in college will give you time to get that score way up high. Here are some ways to improve it:
- Register to vote!!!!!
- Check your credit files regularly – if there are any mistakes you want those to be fixed asap.
- Do NOT miss or be late on any repayments – the consequences could last for years
- Don’t apply to too many credit cards – each time you apply, it leaves a ‘footprint’. Annoying? Yes. Use an eligibility calculator instead: they only do ‘soft searches’ which won’t affect your credit report.
- Apply for credit cards specifically for building credit
- Don’t withdraw cash
- Pay your bills on direct debit
I slowly took the steps listed above, through trial and error. After my bank denied my student credit card (had to have a history in the UK of at least 3 years) I did some research and looked up my score on Equifax. My bank’s credit check appeared on the file but nothing else, meaning I simply had no credit score. Since then I’ve been able to apply for the correct credit card and following the steps above I was successful. Just remember to be careful and to do your research beforehand!
Oh and speaking of which:
Some Awesome Resources