Finances can be tight when you’re studying but is applying for a student credit card the way to make ends meet? And how do the cards work?
Some banks offer specific credit cards for students. You won’t be able to borrow huge sums, as banks put a limit on the credit they make available of typically around £500 – this is on the assumption that students aren’t earning money with which they can to repay the debt.
But, whatever the limit, interest rates are expensive and the cards shouldn’t be seen as a tool for borrowing. However, they can be useful in the right circumstances.
What are the advantages of a credit card?
A credit card offers more protection on purchases than debit cards under Section 75 of the Consumer Credit Act. So if you have a problem with your purchase, such as it’s lost, damaged or stolen, and the supplier refuses to deal with it, you can claim a refund from your credit card provider instead.
The protection applies to purchases above £100 and below £30,000, even if just the deposit is made on the card. The Consumer Credit Directive boosts this protection from £30,000 to £60,260.
Using a credit card also enables you to build up a credit history, which will be useful in the future when it comes to applying for, say, a mortgage or another loan.
Given the impact of the credit crunch makes it trickier to get access to credit these days, wannabe borrowers with poor credit histories are struggling to get mortgages, loans and credit cards, while those with no credit history are also finding it difficult. So starting to develop a credit history when you’re a student could be sensible, provided you pay off the balance of your credit card each month.
A few providers offer student credit cards.
These include Natwest and Royal Bank of Scotland (RBS), which offer a credit card as part of their student current account package, and Halifax - you do not need to have an account in order to qualify for this credit card.
What are the key rules?
If you’re applying for a credit card for the first time, there are some habits it’s wise to get into:
Try to wipe out your balance in full each month. If you pay your balance off in full, you won't be charged any interest. If you don't, the cost of borrowing could be crippling. Halifax’s student credit card charges an APR (annual percentage rate) of 19.9% (variable), while NatWest and RBS charge 18.9%.
If you pay your balance off in full, you won't be charged any interest.
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, however it will cost you to do so.
You'll be charged a withdrawal fee of 3%. Also, cash withdrawals attract a higher rate of interest than purchases. NatWest for example, charges an APR of 27.9% on cash withdrawals.
While many students may struggle to get access to standard credit cards, if you’re an older student or have a regular income stream you may be able to get one of these instead of a student card. This will give you greater pick of the range of credit cards on the market.
Credit cards are not the most forgiving financial product. In addition to high interest rates if you don't clear your balance, you'll be hit by charges for late payments, charges for exceeding your credit limit and usually charges for overseas spending.
Always aim to pay your balance off in full as this both builds your credit rating and helps you remain in control of your spending. This is an opportunity to get a good credit score – so don’t ruin this by failing to make repayments.