The UCAS 2019 application window is now closed, meaning thousands of students are already preparing for university. For many, this will be the first time they have had to manage their own finances. For parents, university can be a great opportunity to help your child learn how build a good credit rating. Taking out a student credit card can be a great way to achieve this – as long as it’s the right card and is used in the right way. Here’s everything you and your teenager need to know before they take the plunge.
Student credit cards: the basics
Credit is rarely provided to under-18s as, if it isn’t able to be repaid, it can’t be enforced through the courts. Student credit cards are designed specifically for young people who haven’t yet built up a sizeable credit history. Typically, applicants need to be over 18, resident in the UK, hold a UK bank account and be registered on a course at a UK university or college of two years or more.
What to look for in a student credit card
- The competitiveness of the annual percentage rate (APR)
- The scale of charges for late or missed payments and annual fees
- The minimum payment due date and when interest is charged from
- The credit limit (usually low on a student card – between £500 and £1,500)
Help them understand interest rates
Having access to instant credit can make spending all too easy, but students who understand there is a price to pay may be more likely to think twice before blowing the budget.
Student credit cards usually come with a higher-than-average rate of interest because young people typically have no previous borrowing history and a low credit score, so pose a higher risk to the bank.
It is important to shop around with your son or daughter for a card that offers the lowest interest rate possible. Ideally, students pay the balance in full each month to avoid interest being charged, but this isn’t always be possible (or likely). Therefore, it’s vital to sit down with your teen and ensure they understand that opting for a card with an interest rate that’s only a few percentage points higher than another can work out significantly more expensive over time. Teach them to look at the hard figures above all else – credit-card perks such as cashback can be alluring, but can sometimes come with higher interest rates and fees.
A new laptop costs £500. If it is purchased on a credit card with an APR of 18.9%, it will cost £525 to pay off over 6 months if only the minimum repayments are made. If, however, it is purchased on a card with an interest rate of 34%, it will cost £543 over the same period.
Teach them how to build their credit score
Taking out a credit card and using it responsibly is a great way to establish a good credit score, and will help your son or daughter with credit in the future, whether in the shape of additional cards, a loan, or a mortgage.
To do this, students need to show they can practice good financial sense: they must keep their spending within their credit limit and pay off their debts each month, or at least make the minimum repayments on time. Doing so for the duration of their university years will stand them in good stead once they graduate.
As well as specialist student credit cards, some lenders offer credit-builder cards that are available to students with little or no credit history. They, too, come with higher interest rates and lower credit limits and give your teen the chance to prove their reliability as a borrower.
Managing a student credit card
Here are some common-sense rules for managing a student credit card effectively – it’s crucial your son or daughter understands them.
Rule one: Pay bills on time
There are three very good reasons to ensure a swift payment: it’s a great way to show lenders how reliable they are, missed or late payments will stay on their credit report for at least six years, and they may be stung with penalty charges and compound interest if they don’t.
Even if they can only afford the minimum payment, it must be paid. One way to ensure they pay at least the minimum repayment on time is to help them set up a monthly direct debit.
Rule two: Don’t withdraw cash
They should avoid withdrawing cash from an ATM using their credit card unless absolutely necessary, as the interest rate will likely be a lot higher than usual.
Rule three: Stick with just one card
Don’t let them apply for multiple credit cards in a short space of time, as it could make lenders think your teen is desperate for credit and a risky prospect, and could weaken their credit score before they’ve even begun.
Rule four: Build a good credit score
Managing a no-frills student credit card could help your son or daughter immensely in the future when they need a mortgage, a loan or a more premium card, and lenders see they’ve been a reliable borrower.
Find the right card for you by comparing credit cards with The Telegraph
Best Credit Cards for Building Credit on Compare the Market
Listed by representative APR (interest rate) from low to high:
For acceptance criteria, fees and charges and any other terms please check with your chosen provider. Terms & conditions apply.
|Provider||Product name||Representative APR||Representative example|
|Vanquis||Chrome 24.7% Credit Card||24.7% APR variable||Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 24.7% (variable), representative 24.7% APR (variable). Credit available subject to status.|
|Tandem||Journey Credit Card||24.9% APR variable||Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 24.9% (variable), representative 24.9% APR (variable). Credit available subject to status|
|Tesco||Bank Foundation Clubcard Credit Card||27.5% APR variable||Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 27.5% (variable), representative 27.5% APR (variable). Credit available subject to status.|
|118 118||Money Credit Card||28.9% APR variable||Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 0.0% (fixed), with a £168 annual fee, representative 28.9% APR (fixed). Credit available subject to status. Monthly subscription fee of £14 (equivalent to annual fee of £168). Total amount payable £1,368.|
Information correct as of 20/05/19
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