It is that time of year: millions of students will be heading to college. For many students, this will be the first time that they will be the targets of banks’ marketing departments.
While the CARD Act changed how lenders can offer college students credit cards, young adults are still able to acquire these potentially expensive products. A study of college student credit cards by MagnifyMoney.com shows that a student new to credit is likely to pay an average APR of 21.4%. And taking out cash is even more expensive, with an average APR of 24.1%.
- We reviewed the Top 50 banks in the US by deposits
- We reviewed credit cards specifically targeting students and actively marketed on the banks’ websites
- All credit cards, with the exception of Capital One Journey, offer a range of Purchase APRs. CapitalOne offers a single, flat APR of 19.8%
- For credit cards that offer a range of APRs, the average range is nine percentage points
- The lowest possible APR is 10.99%, offered by Bank of America on the BankAmericard Credit Card for Students
Note: Bank of America charges higher APRs on student products that earn rewards. A no rewards card has a range of 10.99% - 20.99%. The cash rewards card has a range of 12.99% - 22.99%. The travel rewards card has a range of 14.99% - 22.99%. Remember: rewards can be very expensive!
- The highest possible APR is 23.99%, offered by Citi (both the ThankYou Preferred for College Students and Dividend Platinum Select Visa for College Students)
- If your student credit card is your first credit product, then you will likely have no score. No score means you are the highest risk, and it is highly likely that you will receive the highest price point. The average of the highest price points is 21.4%
If a student charges $1,000 on a credit card and only pays the minimum due at the average rate of 21.4%, it will take 7.6 years to pay back the debt. And the total amount repaid would be $1,941.
Noticeably absent from the list of banks offering credit cards that target students are American Express and Chase. Chase recently exited the business, recognizing that earning interest rates more than 20% on students still in college didn’t feel right.
The CARD Act restricted, but certainly did not eliminate, credit cards that target students. In 2012, applications for student credit cards were at 43.5% of 2007 levels. The CARD Act put the following restrictions into place:
- No pre-approved offers to people under 21, without consent
- If you are under 21, you need to prove that you have income (a part-time job, for example), or have a cosigner older than 21
- Credit card companies can no longer give out free gifts on campus to induce people into signing up for a credit card. No more frisbees or beer mugs
However, there are still plenty of student credit card offers out there. While they don’t give out frisbees, they do offer sign-on bonuses. Citi, for example, gives you 2,500 Thank You points if you spend $500 within 3 months of opening the card. We find that worse than the free frisbee. Before, they would incent you to open a card. Now they are incenting you to spend on the card!
While credit cards can be a great way to build your credit while in college, they can turn into expensive traps that send you down a dangerous path.
The only reason you should apply for a student credit card is to build your credit score. And follow these three tips:
1.Your statement balance should never be more than 30% of your limit. High utilization, early in your credit history, can have a meaningful negative impact. So, just make one to two purchases a month on the card.
2.Pay your balance in full. Credit cards are expensive, and you should not use them to borrow.
3.Never use a credit card for a cash advance. It may seem like easy money, but you will be paying for it.