We hear horror stores all the time with students and credit card debt. For some students, it’s no laughing matter with median credit card debt for college undergrads hovering around $1,600.
Because of this, many jump to the conclusion that students shouldn’t have credit cards at all. In 2009, Congress even enacted the Credit CARD Act that requires individuals under age 21 to have a cosigner on accounts or prove they have income to pay balances.
But is outlawing credit cards for students really the solution to the problem? Or could this cause more harm than good?
Whether you’re for or against credit cards in this case, there are proven benefits to giving them to college students.
Here’s a few reasons students should keep a credit card in their wallet.
Build Good Credit
Using credit cards to improve credit is the most commonly-used argument for justifying credit cards for college students, and it’s a sound one in many ways.
No matter how you dice it up, credit cards are among the best tools for building credit. They factor into every area that’s measured for FICO scores.
Waiting until after college to attempt to build credit can cause problems both immediately after graduation and then further down the line. For example, recent grads may need to be able to pass a credit check to sign a lease on an apartment and if they can’t do that, they may be forced to have their parents to co-sign.
Looking longer-term, having a credit history is crucial for home and auto loans, and a better score will bring the benefit of lower interest rates, too.
Whether you’re against all forms of debt or not, credit is an inevitable part of life for the majority of Americans, and building credit history in college is often advantageous for this reason.
Backup For Emergencies
While I firmly believe all adults should have some sort of emergency fund, I’d argue this recommendation isn’t reasonable for college students. Many college students simply aren’t going to have the luxury to save $1,000 or more and set this money aside for emergencies only.
Although many will argue that you shouldn’t rely on credit in emergencies, using credit cards shouldn’t be discouraged in the most severe situations. I’m talking about cases of a car breakdown in the middle nowhere or for transportation conundrums while traveling abroad.
Yes, there are other ways for parents to send money rather than putting emergency costs on credit. But let’s face it: No one wants their child stranded in a tough spot without access to money if they’re truly in a bind and where calling home may nearly impossible. Credit is a convenient and reliable solution for these tough situations.
Learn Responsibility With Oversight
The requirement that someone co-sign for a student credit card (which is presumably a parent) provides an even better opportunity for parents to step in and help students learn to use credit responsibly.
Sheltering students from credit cards doesn’t mean they won’t face problems down the line. No matter what age, responsibility with credit and debt is something that needs to be learned.
Like many college students, I left school with a couple thousand dollars in credit card debt. Was I happy about it? No. Would I discourage students from ending up in the same situation? Definitely. But I realized how awful it feels to watch interest pile up and learned my lesson the hard way. Since then, I’ve never been in credit card debt.
I wish my parents had been more involved in my early decisions with credit cards. Outside of learning the downsides of using credit cards and landing in debt myself, having reliable guidance from parents may have been the only other way I could’ve really come to understand the pros and cons of using credit and stayed out of debt.
Rewards Geared Towards Students
While I wouldn’t advocate rewards as a reason for a first credit card, for those students that are responsible, there are some very good rewards available.
U.S. News and World Report points out a variety of card recommendations that may be a good fit for students. Features you can look for include 5% back on purchases like gas, groceries, and restaurants. Some even offer cash back on movies, books, and music purchases.
Of course a lower APR is always beneficial, but the goal should be to never pay a cent of interest. Bills should be paid on time, or credit should be be avoided altogether.
Options for Limiting Debt Risk
For those on the fence because of the potential for credit card debt, why not consider obtaining a single card and requesting a low credit limit?
A limit of $500 to $1,000 may be a reasonable starting point to see how things go. While many cards often come with higher limits, it’s possible to call up your card provider and ask for a lower credit limit.
By keeping a low credit limit and starting with just one card, there’s a ceiling to how much financial damage can really be done. If the credit card experiment turns out to be a failure resulting in running a balance that can’t be paid off, the debt incurred hopefully won’t bankrupt a student or a co-signer.