• Beatrice Bullough

The Break Down: Credit Cards

Disclaimer: This article is an introduction to this subject - always consult an expert before making financial decisions.

The general view of credit cards can be a negative one. Fears of debt, repossessions and bankruptcy is a concern for many when thinking about the possibility of borrowing money. While this is a valid apprehension, if you want to take out a mortgage or business loans in the future then you'll want to get yourself a credit card.

What is a credit card?

To really simplify it, a credit card is a loan. The card is attached to a credit account, which is an agreement between you and a bank that they will lend you a certain amount of money, and you will pay it back. The amount available is different for each account and individual and this is called your line of credit and this is the amount that the bank will let you spend, even if you do not actually have that money.

You can use a credit card the same way that you use your debit card - in shops, online or to set up payment plans. The only difference is that a debit card takes money from your account, and a credit card takes money from the bank, which you pay back later. The amount of money that you owe the bank, is payed back in instalments, and the bank will charge you interest on the amount that you owe. If you fail to meet the pre-arranged payments on your loan then you are defaulting on it. This can cause serious issues, both financial and legal, and should be avoided at all costs.

What is interest and APR?

Borrowing money isn't free. Interest is the charge you pay on a loan and is how much extra you give the bank, on top of what you originally borrowed. The longer you go without paying back your loan, the more interest you pay. Many student credit cards will give you interest free spending options and if you pay back all of what you owe each month month then you're not charged interest. It's an important thing to consider before borrowing as you should think about whether you can afford these fees on top of the amount you borrow.

When you apply for credit you will often see lines like "18% Representative APR". APR means annual percentage rate and is a way of saying how much interest and extra fees will be charged with the loan each year. There are two types of APR - Representative and Personal. Representative APR is the rate that banks advertise and more than half of people accepted for the loan will receive. It is best to use this as a general guide as you are not guaranteed to get this rate. Personal APR is the rate you actually end up getting. It will often be higher than the Representative APR though as your credit score improves it can start to match with it.

How are student credit cards special?

There are many different types of credit cards, and student cards are a pretty specific type. To be approved for a credit card you typically need to have a good credit score, as explained in our last article. However students don't usually have a credit history so student credit cards are designed for those who don't have a full time job or history of debt repayments. The downside is that interest is generally much higher and credit limits much lower than it is for those who are older with a good credit score, but in order to work up to that, you have to start off somewhere. Requirements for student credit cards are usually that you're 18, living in the UK with a UK bank account and studying at university or college.

Why should you get a credit card

Credit cards can be really helpful to students. Firstly, it is one of the best way for students to start building their credit score. It can be a very easy way of building up a good history if you use the credit card to buy what you normally would, and set up a direct payment plan to pay it off each month. While credit cards will give you the option to make minimum payments each month, paying it off in full will stop you being charged interest, help you develop good spending habits, and create a good history.

Student credit cards can also help you make up the difference with rent and your lifestyle needs if your maintenance loan or salary doesn't cover it. Paying rent on top of bills with no full time employment can be hard, and smart use of a credit card can help you get by until your student finance comes through each term. There are also other benefits to using credit such as Section 75 which means if you spend over £100 on a credit card, you purchase is protected from issues like fraud because the bank will refund you any money you lose.

Why shouldn't you get a credit card

Financial decisions are very personal, and nothing can vary more individually than credit cards. There are a multitude of reasons why credit cards aren't a good idea for everyone. If you know that the concept of buy-now-pay-later would mean you spend more than you can pay back then that's a huge red flag that it might not be the best choice for you. Credit cards are only a good idea for creating a good financial history if you borrow what you know you can pay back and shouldn't be acquired or used without lot's of thought.

Going into an unarranged overdraft (spending more money than the bank agreed to give you) or being unable to pay back the money you owe on time can get you into serious trouble. Repossessions and legal action can be some of the worst outcomes of misspending like this. The risks of credit cards are very real, and are a threat even if you're not someone who overspends. Even applying for a card and being rejected can be an issue as it will lower your credit score in the same way multiple applications in a short time span will, so you should only apply to ones you think you could be accepted for.

The best way to work out if a credit card is right for you is to look at your finances and budgeting history, if you know you can't trust yourself then it may be worth avoiding. Speaking to a representative at your bank or someone you know who uses credit can also give you more personalised ideas.

The best credit cards for students right now

If you do decide that a student credit card is for you, then there are a number to choose from. There are a number of student credit cards, with experts weighing in on the best here and here. Remember that you'll have to compromise between high limits and low APR, with options such as HSBC having a lower APR of 18.9% but a limit of £500 and Barclays charging 33.9% APR but offering a £1,200 limit.

It's also important to bear in mind that what you see offered isn't necessarily what you'll get, it's more of a guideline, with the bank having the final say in what they offer you. You should also consider long term aspects of your lifestyle before choosing which card is best for you - if you travel abroad for your degree then offers like HSBC may be better for you. The best card for you will be an individual choice, but factors you should take into consideration when deciding which card is best are:

  • The credit limit - the support you need from a card is going to vary according to your circumstances, but think about how much you spend each month currently, and whether the credit card you're looking at can reach that. Student credit cards can have limits anywhere from £500 to £1500 with many giving you higher limits in later years of your course.

  • The APR - if you have no other choice than repaying your loan over multiple months then you'll want a card with a lower interest rate. If you pay in full each month (which you should aim to) then this won't be a problem.

General Key Rules for using credit cards

  • Only spend what you would with a debit card - use it to pay for things like bills and groceries

  • Pay off the balance in full every month - you can set up a direct debit payment from another account to make sure this happens

  • Don't use all, or over your credit limit - this will stop you spending more than you can pay back and help boost your credit score

  • Work out your priorities - whether a high credit limit, low APR or other incentives, decide what you're looking for before applying to any cards

  • Talk to a bank rep and do your own research before making any decisions