Certainly they shouldn’t be seen as an easy way of borrowing if you max out on your overdraft and spend your student loan. However, credit cards can be useful for students.
Don’t assume that you’ll be able to go on a massive spending spree. The banks that provide student credit cards are careful about the credit they make available – limits tend to be set between £300 and £500 because obviously most students have little or no earnings so the amount you can borrow is limited. However, a credit card still has its uses.
Not only can they be convenient, they also provide more protection than debit cards on purchases.
In fact, under Section 75 of the Consumer Credit Act, if you have a complaint about a purchase and the supplier refuses to deal with it, you can claim a refund from your credit card provider on purchases above £100.
The other big plus is that having a credit card as a student may make it easier for you to borrow in the future – when you’re looking for a more substantial loan such as a mortgage, or for a car.
It’s well documented that credit is much harder to come by than it was a few years ago. But it’s not only those with impaired histories who are struggling to get mortgages, loans and credit cards. Those with no credit history are also finding it difficult. In many ways it’s easy to understand why:
If you’ve had a credit or loan you’ll have either proved you can borrow responsibly in which case banks and building societies are likely to be willing to lend again to you, or you’ll have struggled to keep up with repayments, and in some instances may have missed payments altogether, in which case, and unsurprisingly, providers will be reluctant to lend.
But if you’ve never had credit before how do banks and building societies know how risky lending to you is? This is where having a credit card while at uni can be useful as it helps you build a credit profile.
There are only three providers offering credit cards to students. Natwest and Royal Bank of Scotland (RBS) include a credit card as part of their student current account package. Halifax is the other bank offering a student credit card – although it has a student current account, you do not need to have an account in order to qualify for the credit card.
If you’re applying for a credit card for the first time, there are some good habits to get into:
Always try and clear 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 is high. Halifax’s student credit card charges an annual interest rate of 17.9%, while NatWest and RBS charge 18.9%.
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 3.0%. Also, cash withdrawals attract a higher rate of interest than purchases. Natwest for example, charges 27.9% on cash withdrawals. What’s more you start accruing interest from the day the withdrawal is made so even if you pay your bill off in full at the end of the month, interest can’t be avoided.
Most students will struggle to qualify for other credit cards because they have not built up a credit history and they earn very little money.
However, if you’re an older student or have a steady income, you may well find you qualify for a standard credit card, which will give you a wider choice than the three products specifically targeted at students.
Read our article ‘10 golden credit card rules’ for some top tips on sensible spending.
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.
If you don’t manage a credit card, or any student debt well, it will affect your credit rating and you could find yourself being penalised in the future.