Lori Meadows
Credit cards are a convenient way to make purchases without immediately withdrawing money from your bank account. However, they come with the added cost of interest, which is a percentage of the unpaid balance. While credit cards can help students build their credit history, they also carry the risk of long-term debt and high-interest rates. Student credit cards often have higher interest rates than regular credit cards due to the lack of financial experience and credit history among students. Therefore, it is crucial for students to understand how credit card interest works and manage their spending responsibly to avoid accumulating debt.
| Characteristics | Values |
|---|---|
| Interest charged on credit cards | Credit card companies charge interest on the unpaid portion of the statement balance carried forward to the next billing cycle. |
| Interest calculation | Interest is calculated as a percentage of the unpaid balance. The rate can be fixed or variable. |
| Interest rates for student credit cards | Student credit cards tend to have higher interest rates than regular credit cards due to the lack of financial experience and credit history of students. |
| Average interest rate | As of September 2024, the average APR of credit cards tracked in Investopedia's database was 24.74%. LendingTree reports that the average interest rate on student credit cards was near 24% around the same time. |
| High interest rates | Student credit cards can have very high-interest rates, as high as 29% in some cases, according to Cherry from CNBC. |
| Avoiding interest | To avoid interest charges, it is recommended to pay the credit card bill in full every month. |
| Student credit card benefits | Student credit cards help build credit history and can offer introductory 0% APR offers and cashback rewards. |
| Student credit card requirements | To qualify for a student credit card, individuals typically need to be at least 18 years old, enrolled in college, and may need to provide proof of income. |
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What You'll Learn
Interest-free introductory offers
Many credit cards designed for students offer interest-free introductory offers. These are typically for a limited period, after which the standard APR will apply to any balance remaining on the card and any new purchases.
For example, the Discover it® Student Chrome card offers an introductory APR of 0% for 6 months on new purchases, with a low introductory APR on balance transfers. This card also has a $0 annual fee, but a 3% intro balance transfer fee, up to a 5% fee on future balance transfers, and a regular APR of 17.24% - 26.24% Variable.
The Wells Fargo Reflect® Card offers a zero-interest introductory promotion for 21 months from account opening, with no annual fee. However, this card has a balance transfer fee of 5% (min $5), and a regular APR of 17.24% - 28.99% Variable.
The U.S. Bank Shield™ Visa® Card offers the longest interest-free introductory period on the market at the time of writing: 0% for 24 months. This card also has no annual fee, and you can earn rewards on select purchases.
The First Federal Community Bank Visa® Business Credit Card offers an intro APR of 0% for 18 months on new purchases and balance transfers. This card has a regular APR of 16.99% - 25.99% Variable.
The Discover it® Student Cash Back card features generous introductory offers, including 0% intro APR on purchases for 6 months, then a standard variable purchase APR of 17.24% - 26.24%. This card also offers 5% cashback on everyday purchases at different places each quarter, such as grocery stores, restaurants, and gas stations, with unlimited 1% cashback on all other purchases.
It's important to note that most 0% intro APR cards have fairly high regular interest rates, so it's advisable to pay off most, if not all, of the balance during the low-interest period.
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How to qualify for a student credit card
Students can qualify for a credit card by meeting certain requirements. Firstly, they must be over the age of 18 and have a steady source of income. Students will also need to provide proof of enrolment, usually in the form of a document confirming their name, school name, and enrolment dates. Additionally, they may need to provide income information.
Some credit card companies offer cards specifically designed for students with little to no credit history. These include Capital One, which offers student cards with no annual, hidden, or foreign transaction fees, and Discover, which offers cards with no set credit limit and a minimum credit line of $500. Students can also consider cards like the Bank of America Travel Rewards for Students, which has no foreign transaction fees and an introductory 0% APR on purchases and qualifying balance transfers for 15 billing cycles.
It is important to note that credit card interest is the cost of borrowing money, and it is typically expressed as an annual percentage rate (APR). Students should understand the APR of any card they consider, as it represents how much interest they will be charged for unpaid balances. To avoid interest charges, students should aim to pay their credit card bill in full every month.
Students can also consider getting pre-approved for a credit card to see which cards they qualify for without damaging their credit score. Several factors, such as credit score, payment history, and income, may influence whether someone is approved for a credit card. By getting pre-approved, students can make a more informed decision about which card to apply for.
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Student credit cards vs. regular credit cards
Credit card interest is the cost of borrowing money from a credit card company, typically expressed as an annual percentage rate (APR). Interest is usually charged when cardholders carry unpaid portions of their statement balance into the next billing cycle.
Student credit cards are designed to help students establish positive credit habits and access rewards and other perks. They tend to be easier to qualify for than regular credit cards because students usually have a limited credit history. Student credit cards usually have lower credit limits, and may have different credit score requirements and perks. Student cards also often have different ways of defining income, which can make it possible for those under the age of 21 to qualify. They may offer cash-back rewards and introductory 0% APR, meaning students won't pay interest on purchases for a certain number of billing cycles.
Regular credit cards, on the other hand, offer a wider range of reward options to cardholders with good or excellent credit. They usually require a credit history and a good credit score. Regular credit cards may have higher credit limits, but they also carry more risk.
It's important to note that if you carry a balance from one billing cycle to the next, you may owe interest even if you pay the new balance in full. To avoid interest charges, it's recommended to pay your balance in full by the due date every billing cycle.
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How to avoid paying interest
Students, like any other credit card user, will have to pay interest on their credit cards if they do not pay off their balance in full each billing cycle. This is because credit card interest is the cost of borrowing money from a credit card company, and it is typically shown as an annual percentage rate (APR).
- Pay your balance in full every billing cycle: Paying your balance in full by the due date every billing cycle can help you pay less in interest than if you carry over your balance from month to month. This is the most effective way to save money on credit card interest.
- Pay more than the minimum: If you cannot pay your balance in full, it is recommended to pay as much as possible and at least the minimum credit card payment. This can help reduce interest charges if you are carrying a balance.
- Pay early: You don't have to wait until the end of the billing cycle to make a payment. Paying earlier or more than once a month may help reduce interest charges if you are carrying a balance.
- Use a credit card with a 0% introductory rate: If you need to borrow money, consider applying for a credit card with a 0% introductory APR on purchases. Just make sure you know when the introductory period ends, as the APR will increase to the standard rate after that.
- Balance transfer: If you already have credit card debt, consider moving it to a balance transfer credit card. These cards offer a long period of time, typically a year or more, to pay down your debt at 0% interest. However, you will usually need a good or excellent credit score to qualify for these cards, and there may be a balance transfer fee.
- Deferred interest financing: Some store cards or medical credit cards offer deferred interest financing. This can be helpful, but it comes with a catch. If you don't pay your balance in full by the end of the promotional no-interest period, you will owe interest on the entire amount you originally borrowed, not just the remaining balance.
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The risks of student credit cards
Credit card interest is the cost of borrowing money from a credit card company. Credit cards usually have variable interest rates, which are typically high for student credit cards. Student credit cards generally have higher interest rates than other cards because banks consider it riskier to lend to college students. If you carry a balance, you will be charged interest on the original amount, which can quickly add up, leaving you with serious debt.
Student credit cards are designed specifically for those attending college, and applicants without a credit history can qualify for one. They are a great way for students to build their credit history, which is especially important for international students who do not have a credit history in their new country. However, one of the biggest risks of student credit cards is that they make buying things very easy, which may lead to bad financial decisions and purchases that are unaffordable.
To avoid paying interest on your credit card, you should pay your balance in full every billing cycle. If you can't pay your balance in full, you should pay as much as possible and at least the minimum credit card payment. You can also reduce interest charges by paying earlier or more than once a month.
It is important to be aware of the risks of student credit cards and to use them responsibly. Students should make a budget based on their monthly cash flow and expenses and stick to it. Student credit cards should only be used for necessary purchases, and the balance should always be paid off in full each month.
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Frequently asked questions
Yes, students will have to pay interest on their credit cards for any purchases or amounts they don't pay off each month. Student credit cards tend to have higher interest rates than regular credit cards due to students' lack of financial experience and credit history.
Credit card companies usually charge interest as a percentage of your unpaid balance. This is called an Annual Percentage Rate (APR). APRs can be fixed or variable. Variable APRs can change over time based on an index, such as the prime rate.
Students can avoid paying interest by paying off their credit card balance in full each month. Some student credit cards also offer introductory periods with 0% APR, meaning students won't pay interest on purchases for a certain number of billing cycles.
