Giving your child a credit card in college is a perfect way to jump start his credit history. He can build his FICO score during his four-year college career, and then buy a house or car after graduation. There are benefits and risks to student credit cards. On one hand, these credit cards can teach students money management and credit habits. But on the other hand, there is a chance that students will accumulate massive debt, which can set them back financially.
Despite the risks, student credit cards can be a good thing. The key is finding the best credit card for your student and fully educating him on credit management. If you’re looking for a credit card for students, here are a few features to consider.
Low Credit Limit
Giving your student access to a high limit credit card is a recipe for disaster. There is a greater temptation to spend, and if your child can’t pay back the balance, you’re responsible for the debt. Some student credit cards offer initial limits as high as $1,000. But if your child is new to credit and budgeting, look for credit cards that offer lower limits — perhaps $300 or $500.
Low Annual Fees
Because many students don’t have a strong credit history or a lot of income, some student credit cards charge an annual fee. Annual fees vary, but can range from $35 a year to well over $100 a year. These fees are charged directly to the credit card on your child’s anniversary date. While you can’t always avoid annual fees, you can compare different credit cards to keep the annual fee to a minimum.
Low Interest Rate
If you’re looking for a credit card for your student, don’t apply for any random credit card. Student credit cards typically have higher interest rates, which is understandable since young adults present a higher risk. But this doesn’t suggest paying a ridiculously high interest rate. Research different credit cards and compare rates ands fees. Some credit cards may charge rates over 20%, whereas other credit cards charge far less.
Secured Credit Cards
Secured credit cards offer the best of both worlds — low credit limits and competitive interest rates. But there is a major catch. Secured credit cards do require a deposit, usually between $300 and $500. Some people hate the idea of paying upfront for a credit card, but if your child doesn’t have a credit history and doesn’t qualify for other types of credit cards, a secured credit card is the next best thing. There are no credit checks, and once your child demonstrates a pattern of on-time payments, the bank may refund his security deposit and offer him an unsecured credit card.
Prepaid Credit Cards
A prepaid credit card isn’t your typical credit card. There isn’t a bank extending a line of credit. Instead, your child spends only what he deposits on the card. Prepaid credit cards are a good idea if you feel that your child isn’t ready for a traditional credit card. These credit cards can give him practice and prepare him for a traditional credit card in the future. He’ll learn how to budget his money, as well as control frivolous spending.