Student Rewards Credit Cards: the Pros and Cons
By Eva Norlyk Smith Ph.D.
December 19, 2012
While they may have limited credit histories, that has not stopped card issuers from tapping college students with rewards cards.
Cards such as the Journey Student Rewards card from Capital One (which earns 1 percent cash back) and Discover’s Student More card (which earns 5 percent cash back in certain categories) are just two examples.
While they may look like the perfect match for a cash-strapped student, it’s important to look beyond the potential for pizza money and understand what a rewards card can mean for your finances.
Here are some student rewards card pros and cons to keep in mind.
1. Convenience and ease: It’s hard to get by in today’s society without plastic, whether it offers rewards or not. Booking a flight, renting a car or making online purchases generally require a credit card. Credit cards are great for emergencies, too, or when you need a little extra help to fund a large purchase.
2. Credit cards help you build credit: One of the best reasons to get a student credit card, with or without rewards, is to start building credit.
“Parents giving their son or daughter a debit card when they go off to college to play it safe don’t solve anything,” says Scott Gamm, founder of the founder of student-focused personal finance website HelpSaveMyDollars. “Debit cards don’t help build credit at all, because the activity is not reported to credit bureaus.”
Although the Credit CARD Act of 2009 made it tougher for students under 21 to get their own credit cards, specialty credit cards designed for students are relatively easy to get. Most issuers don’t require a co-signer for student credit cards, as long as the applicant has sufficient income (such as from a part-time job or student loans) to pay the monthly bills.
In fact, banks tend to court college students, viewing them as great prospective customers who will one day get good jobs and get more credit cards with the bank that served them in college. Ironically, college graduates often find it more difficult than students to get a credit card if they have no previous credit history, even if they have a higher income.
3. Credit card rewards can save students money: Reward earnings on college student credit cards vary from 1 percent to 5 percent for different types of purchases. While that’s not big money, it can build up over time.
While the benefits of student credit cards are considerable, there are some traps to look out for.
1. Mistakes are costly: While issuers may offer up an attractive assortment of perks and rewards, they are in the business to make money, and have ways of stacking odds in their favor in exchange for those rewards, including:
- High interest rates. Student rewards credit cards often feature interest rates of 20 percent or higher — a high premium to pay for the benefit of carrying a balance.
- Cash advances that charge a high APR with no grace period, plus a cash advance fee.
- Introductory 0% APR offers on purchases for the first six months. These make it very tempting to accumulate balances.
- Penalty APRs as high as 23.99 percent that may be levied if you fail to make payments on time.
- Late fees and returned payment fees to the tune of $25 to $35 each.
2. Student rewards cards make it easy to overspend: Any credit card carries with it the temptation to overspend, but for rewards cards, this is even more the case. The prospect of earning rewards and deals make even experienced consumers tend to spend more. For students new at the credit card game, this can be even more of an issue.
“Many students use credit cards to finance a fancier lifestyle, fancy restaurants, more expensive clothing, concert tickets and so on,” Gamm says. “”Credit cards are other people’s money and debit cards are your own money. You can get into trouble with both, but at least with cash, you feel the pain when you have to shell out the money.”
3. Rewards may disappoint: Earning 5 percent cash back on purchases sounds great, but read the fine print, and those offers are less than dazzling. That high 5 percent cash-back rate will likely be offered in rotating categories. . Plus, cash-back earnings are typically capped each month or quarter, limiting the amount of cash you can earn.
Just as disappointing, you may have to meet initial spending requirements. For example, with the Discover Student More card, earnings on discount store and warehouse purchases are just 0.25 percent until you’ve spent the first $3,000 each year, and 1 percent after that. Not all student rewards cards offer this limitation, however. The Citi Dividend Card for College Students comes with a full 1 percent cash-back rate on all purchases, regardless of spending.
The bottom line
College is an important time to lay the foundation for a good credit record, and as long as you are aware of the pros and cons, there is no reason you shouldn’t be applying for a rewards card.
For best results, consider student credit cards that help you build credit by adding extra rewards each month the bill is paid on time, such as the Journey Student Rewards card from Capital One or the Citi Forward Card.