A student credit card isn’t really different from a regular credit card. They work the same. They might look a little different as credit card companies have tried to appeal to the students by either allowing them to personalize the card with a picture, initial or by choosing a few preset options. But the small plastic cards still enable the student to purchase goods and services on credit, with the promise to pay at a later date.
The card issuer can be a bank or other financial institution, or the cards can be issued by the retail store or service company for their specific product. The card issuer sets a limit to the card holder and based on how payments are made, the card holder may raise or lower that limit.
Having a student credit card can be a great way to establish a credit history. But these credit cards often carry a high interest rate. A quick perusal of rates showed that percentages varied widely from a credit union credit card of under 10% with no fees and no reward offered, to cards with an interest rate of over 21%.
Credit Card versus Charge Card
Student can get either a credit card, or a charge card. Even thought the terms are often used interchangeably, there is a difference. A charge card requires you to pay the total balance of money charged to the card at the end of each month. They usually have an annual fee, offer rewards and if you pay the entire bill each month, there is no interest charged. An example of this type of card would be the traditional American Express Green Card.
A credit card would allow the student to carry a balance forward and pay anywhere from the minimum monthly payment, to the full amount charged to the card. With a credit card, interest accrues each month on the balance left over after a payment is made.
New Rules And Regulations
There are new rules and regulations that will take effect as of August 2010 that specifically address student credit cards. An adult cosigner is now required for all students or anyone that is under 21 years old, unless the under 21 year old can prove they have consistent means to pay for the credit card. The adult co-signer will be asked to assume responsibility for the credit card payments and to prove that they can afford to make those payments if the student defaults.
Another rule that affects students under the new laws is that the credit card companies will no longer be allowed to market on or near campus if they offer promo items like free pizza or gifts if the student fills out a credit card application.
These new regulations are designed to stop students from getting a credit card, defaulting and leaving their parents liable for the credit card debt when they didn’t even know that the student had a credit card.
Secured Credit Cards
One option often offered to students is a secured credit card. This type of credit card requires a security deposit on the account. That deposit generally equals the credit limit. The deposit is held in a special savings account; it does accrue interest, but can’t be accessed by the account owner. The credit card can be utilized for any purchases and after having the secured credit card for a year and establishing a history of on time payments, the card issuer will generally re-evaluate the card holder’s status. At this time if the payments have been made on time, the security deposit is released and a credit limit assigned to the card holder.
Prepaid &Credit-Cards"
These cards are not actually credit cards but are a type of stored value card. There is no credit check done for these types of cards. The parent or student simply makes a deposit that stores money on a card. These prepaid cards carry a credit-card brand like Visa, Discover or American Express, and can be used just like any credit card. The money stored on the card is reduced each time the card is used.
Prepaid cards can be given to students as young as thirteen years of age. There is no interest on these cards, there is sometimes a fee to purchase the card and there may be monthly fees or "non-use" fees if the card is not used in a specified period of time. As with any type of credit card, make sure you verify all the fees.
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Event if the 20% discounts on these store credit cards are tempting the advice is not to open such an account. The stores are interested in having as many customers as possible owning this kind of cards because we are surely spending more money when we are using a credit card. More than that, on these private credit cards they earn a lot of money. There is a big difference between private credit cards, or store credit cards, were we pay an average interest rate of 24%, and the prime credit cards, like visa or master card, were the interest rate is around 12%.
Even if the Credit Card Protection Act of 2009 will go into affect in February, things won’t change a lot regarding the predatory practices. It won’t change anything about the interest rates. On the other hand the big plus is that it changes the transparency and the disclosure around the debts and conditions. From February on, you credit card statement will show you how many moths it will take to pay off that balance if you only paid them in a month and it affects how quickly fees and terms and conditions of the credit card can be changed, but it won’t stop any of this from happening.
Just signing up for such a store credit lowers your credit score. Because they like to see longer, older credit history, a new credit card makes your credit history younger, so for them it represents a higher risk. The other thing that lowers your credit score is utilization, when you utilize almost all the credit you have been given. The advice is to cancel all extra credit cards even if your credit score will take a hit, it will repair itself over time.
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Credit card companies may have a number of fees or other costs with which they may charge you with or without notice. One of these charges refers to rates. The surprise rate element is that they can double or even triple rates on consumers, but they have to give you a two weeks time notice.
Another problem is with the credit limits. They have been cutting credit limits, but more than this they cut them as much as they can possibly can, reaching to just $2 or $ 3 over your outstanding balance. This way you can easily go over your credit limit and thus pay an extra fee. Also this affects you credit score because you are using a larger percentage of your available credit. Concerning that 30% of your credit score is based on the percentage of the credit that you are using, this will have an impact on your future loans, or mortgage. You have no prior notice of this action so you can only find it in your statements.
International fees are also surprise fees, so to say. These fees are charged when you make acquisitions over seas and not only when you are traveling but also when you make online purchases. These fees also grew from 1-2 % to 3% at almost every bank.
Finally beware of protection plans. They are supposed to be a safety net in case you are fired, but the reality is that they are going to freeze your account and charge you $1 a month for every $100 balance that you have. This adds up and than your interest rates will grow with 50-100 %.
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