Debit, prepaid or credit? For students heading off to college, the choice of which type of plastic to bring to campus can be a confusing one for both students and their parents.
For those concerned about overspending, a debit or prepaid card may seem like the safer alternative. Except for one thing:
“Debit and prepaid cards don’t help build credit at all; the activity is not reported to credit bureaus,” says Scott Gamm, a junior at New York University’s Stern School of Business and founder of student-focused personal finance website HelpSaveMyDollars. “Parents giving their son or daughter a debit card when they go off to college tend to overlook that these are not a tool to build credit.”
Getting a student credit card, on the other hand, can help students learn to manage credit and build a good credit history, Gamm says.
“There is definitely a need for credit card at a young age to help build credit,” Gamm says. “However, there’s not enough financial education in school, so most students don’t realize that the sole purpose of a credit card is not to accumulate airline miles or rewards points but to build a credit report.”
Student credit cards are easier to come by than one might think: While the Credit CARD Act requires a co-signer for people under 21 years old if they have no income of their own, most major card issuers don’t require a co-signer for student credit cards, as long as the applicant has sufficient income to pay the monthly bills. For online student credit card applications, for example, most card issuers primarily make their decision based on information about the applicant’s annual income and other financial information, such as financial aid and monthly housing payments.
Is there a risk? Gamm has two credit cards, which he pays off in full each month. Yet he knows of friends who got three or four credit cards in short order and used them to finance a lifestyle they couldn’t afford.
“It is sort of a double edged sword,” Gamm says. “You have to have a credit card to build credit, but it’s so easy to get into trouble. It’s a tough balance.”
So if you don’t trust yourself (or your kid) to handle credit, a debit or prepaid card can be the safest choice. However, if you’d like to start developing your credit management skills (or help your college-bound kid to do so), we narrowed down the playing field to two credit cards that are low-maintenance and relatively low-cost. They also offer incentives to maintain good credit behaviors.
Journey Student Rewards from Capital One
The Journey Student Rewards card from Capital One is a rewards card with a twist. Cardholders get a standard 1 percent cash-back rate on all charges. Each month the bill is paid on time, the cash-back rate for the month’s purchases gets bumped up to 1.25 percent.
Purchase annual percentage rate (APR): Like most student credit cards, the purchase APR is high (19.8 percent), so avoid carrying balances over from month to month.
What we like: The Journey card comes with some great interactive tools to make the process of credit building more real. The card gives students access to a monthly credit score and an online tracking tool to monitor credit on an ongoing basis. Students can set up text and email alerts with payment reminders, and for the motivated student, the Journey website offers free credit tools for further education.
Watch out for: Cash advance checks: Capital One offers “free” convenient cash advance checks to use with the card. Don’t use them. The consequences of getting a cash advance include a higher interest rate, currently 24.9 percent and, in many cases, a 2 percent to 3 percent check fee as well. And unlike with purchases, there is no grace period on cash advances — the interest clock starts ticking from day one.
Penalty rate: One late payment may trigger a 29.99 percent penalty APR on new charges, which, if the payment is more than 60 days late, will apply indefinitely.
Citi Forward Card for College Students
The Citi Forward Card is a basic rewards card that lets cardholders accumulate Citi ThankYou points toward a range of rewards, including free travel, merchandise and gift certificates to stores and restaurants.
Purchase APR: While the card advertises variable purchase APRs ranging from 13.99 percent to 22.99 percent, people with no previous credit history should expect to get the highest APR.
What we like: Cardholders get tangible rewards for good credit habits. Each month they pay on time and stay under the credit limit, cardholders get 100 ThankYou points. And, for each consecutive three-month period cardholders keep up these credit habits, Citi will shave off 0.25 percent from the APR, up to a total of 2 percent.
Watch out for: Paperless statements: Citi offers 1,000 ThankYou points for students who sign up for paperless statements. Don’t do it; particularly for new credit card users, out of sight is out of mind.
Penalty rate: One late payment or a bounced payment can trigger a 29.99 percent penalty APR on new charges, which may apply indefinitely.