Student Credit Cards
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When you’re in college or university, one of the most important things you can do for your future actually has nothing to do with what you’re studying – you need to build your credit. After you graduate, “real life” begins. In the real world, you need a good credit history to apply for an apartment to rent, finance a car and, eventually, apply for a mortgage to buy a home – and qualify for the best mortgage rates while doing so.
One of the easiest ways to build your credit is to start using a credit card when you’re young. By paying for things with a credit card versus a debit card or cash, and paying off the full balance at the end of each month, you can learn how to manage your money and establish a good credit history with Canada’s two credit report agencies.
Pros of Student Credit Cards
There are a few reasons you should consider putting a student credit card in your wallet:
- There are no (or low) annual fees
- It will help you establish your credit history
- You can learn how to manage your money responsibly
Cons of Student Credit Cards
There are also a few reasons you may not want to use a student credit card:
- They come with fewer rewards or benefits
- They have high interest rates on outstanding balances and cash advances
- If not used responsibly, a credit card could cause some students to rack up debt they can’t afford to repay
Furthermore, you have to be the age of majority in your province, in order to apply for a student credit card. See the image below for the age of majority in each province.
Age of Majority Map
When to Use a Student Credit Card
Since the goal of a student credit card is to establish your credit history and build up good credit, you should only use your card if you know you can afford to pay off the balance at the end of the month. To do this, you could simply use your student credit card to pay for a few small bills each month. Or you could decide that you’ll only use it to purchase textbooks online at discounted prices. However, if you’re really good at budgeting and managing your money, you could use your student credit card to make all of your purchases – but only if you know you can pay the bill at the end of the month.
Most student credit cards also come with the ability to take out cash advances, but we don’t recommend you get into the habit of doing that. With the high interest rates associated with cash advances, you can quickly rack up a credit card bill that you can’t afford to repay – especially because interest on a cash advance starts to accumulate immediately, not after the grace period given for typical purchases. You don’t want to get stuck trying to dig yourself out of credit card debt at any point, but especially not while you’re a student with unknown future employment.
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How to Use a Student Credit Card Responsibly
It’s one thing for us to say “pay off your full balance each month”, but what does that actually entail? Being a student, you likely haven’t had to manage much money before, but it’s important that you start now – and the best way to do that is with a monthly budget.
A budget is simply a tool that shows you how much money is coming in each month and how much is going out. Coming in will be any paycheques you earn through your part-time job, extra tip money you make on the side, etc. And going out includes all of your expenses: from rent and bills, to groceries, transportation and any money you have leftover for “fun”.
Here’s an example: Let’s say you work part-time while you’re in school and bring home $600 each month. You live at home, so you don’t have to pay rent, but your parents ask you to pitch in $100 each month for groceries. You also need to pay for car insurance, gas and your cell phone. You like to keep some “fun money” for clothes, coffee and socializing with friends. And, because you know how important it is to save, you like to put away 10% of your paycheques.
As you can see, you’re on a pretty strict budget. However, you decide to get a student credit card so you can establish your credit history and start building up a good credit score. The best way to use your new credit card responsibly is to:
Never spend more money than you can afford to repay, so you can always pay off the balance in full each month
In this example, it would be best to get a student credit card with a $500 limit, so you’re never tempted to spend more money than you can afford to repay each month. Then you can pick and choose what to pay for with your credit card, knowing you have the money to pay off your balance at the end of the month.
If you want to be strict with your student credit card, you may decide to only use it to pay for gas ($100) and your cell phone bill ($75). If that’s the case, keep track of how much you’re spending on your credit card, try to stay within $175, and keep that amount in your bank account so you can pay the bill when it comes in.
The bottom line
Building credit is a system of borrowing money and paying it back. By using your credit card and paying off the balance each month, your credit card company will tell credit reporting agencies that you are someone who is responsible with their finances. And the way you’ve used credit in the past is seen as the way you’ll use it in the future. By using a student credit card responsibly right from the start, you can build up your credit and let future lenders know you are someone they should lend money to.