how to get Credit cards for students with bad credit
Building credit is something that every person should start as early as they can in their life. Students, in particular, have a great opportunity to set the record right and build up their credit scores from an early age.
Credit cards, if used responsibly, can be a great way to pay for expenses and build credit at the same time. However, getting a credit card as a student can be tricky.
The recent law called the Card Act of 2009 makes it quite difficult for students to access a credit card. Some would argue that it protects students from predatory marketing practices by credit card companies. Students may also have difficulties getting a credit card if they have bad credit.
This bad credit could be because of unpaid bills, a bad record from a past account, a delinquent loan, emergency medical expenses, or just a financial emergency of some sort that ended up straining financial resources of the student.
Whatever the reason may be, bad credit makes accessing credit quite tricky. Even getting a loan, rental housing, or a cell phone plan can be complicated.
how students can improve their credit score?
By using a credit card and making timely payments, a student with bad credit can gradually push up his/her credit score. The credit card account information that gets passed on to credit bureaus positively impacts the credit scores of the student holding the credit card. Having a good credit score can help a student get an auto loan, certain jobs, and even a home loan. Using a credit card is perhaps one of the easiest ways of building credit.
Types of Credit Cards
Before we go into the various features on which credit cards differ, first let us understand the main types of credit cards that students with bad credit can look at. There are two main types – secured credit cards and unsecured credit cards.
Secured credit cards are the recommended option for many students. They work on the principle of a security deposit. Essentially, when you apply and get approved for this type of card, you have to hand over a minimum amount as security deposit. This amount is your credit limit.
So, you can spend and pay the bills using your credit card and things go on as they would with a normal credit card. But, if you are unable to make a repayment for some reason, the security deposit gets adjusted and the card issuing company has its money back.
There is an element of secure, hence the name secured cards. These cards allow students to pay expenses and build credit at the same time. The information of the account gets sent to the major credit bureaus.
Secured credit cards do not charge extremely high fees that unsecured cards do. The APR rates are high, but there is normally no annual fee and other fees. Since you are paying the deposit upfront, there is no chance of default. So, the approval process is quick and the approval rates are high. Use these cards as students with little or no credit history. They can help build up a credit score without much hassle.
The other type of credit cards for bad credit are unsecured credit cards. They do not involve any security deposit. All you have to do is pay the application fee and an annual fee. Since there is no “safety net” of a security deposit, the issuance of such cards is a lot riskier for the card company, as they could face the prospect of a default and not get their money back. So, the interest rates and other fees on these cards is higher than what you might see with a secured card.
Upon paying the application fee and the annual fee, you normally start off with a credit limit of $200 or sometimes $300. Increasing credit limit is not an easy task either. It is not as if you can just pledge a higher security deposit and get the limit increased. You have to build credibility in order to get a higher credit limit. That happens only with time when you have made a few monthly payments on time and established a track record.
Unsecured credit cards are decent short-term options that can just about get you started. But it is not the best option and you can definitely move on to better cards once you have built up your credit score.
Features offered by credit cards
Now that you have a basic idea of the types of credit cards that you can get outside of the normal conventional options, the next question obviously would be which credit cards specifically can students with bad credit look at.
Another question that may come to mind would be how to evaluate the various credit card offerings and what to look for specifically when trying to research credit cards for students. So, let us look at some of the features that secured and unsecured credit cards offer:
- Interest Rate – This is perhaps the number on metric that everyone wants to look at. APRs range from 20-25% in most cases. This is what you pay when you have outstanding balances on your credit card account. Unsecured cards tend to have a higher rate, but check the APR on every card you research.
- Credit Limit – Some offer $200.00, some $300.00, but understanding the credit limit is quite important. It gives you a clear picture of how far you will be able to go in using your credit card for paying expenses. You would also want to learn about how this limit can increase in the future. Increased limits due to timely payments can really boost your credit score.
- Annual Fees – Annual fees are charged by some cards while there are other companies that do not charge such a fee. An annual fee is essentially the cost of holding a credit card. You want this cost to be as low as possible. Hence, try to look for cards with no annual fees. As a student, this is critical because you want to keep the cash outflow to a minimum.
- Other Fees/Charges – Know all the fees that a credit card will charge you. There are multiple fees other than the annual fee, such as application fee, starting fee, foreign transaction fee, cash advance fee, and so on. It is important to know these beforehand so that you do not feel the unpleasant surprise when you do a specific kind of transaction and see a fee for it unexpectedly. It goes without saying, the lower (or lesser) these fees are, the better it will be for you.
- Information reporting to credit bureaus – This is a critical point. As a student, this one is a must. You are using a credit card to build up your credit. This building up can only happen if the credit card company passes on the credit information to the big three bureaus: Experian, Equifax, and TransUnion. They are the ones who compile credit scores and your progress has to reach them. Without this feature, the appeal for a student to use a credit card goes drastically down.
- Cashback and other benefits – This point is not the most important one, but it is always nice to have all the benefits of using a credit card and enjoy cashback as well. Conventional cards offer cashback rewards and now some secured and unsecured cards have started to do the same. Everyone loves to save 1% or 2% on the gas station, grocery, and other purchases. If not cash back, some cards might offer auto rental benefits or travel benefits. Check the print for these things if possible.
- Approval Timeline and process – Read about how long it takes to get approval for credit cards that you are researching. Is it instant or does it involve a detailed application? Especially check if a hard credit check is done. A hard credit check will lower your score every time it is performed, so you do not want that. You want a soft credit check, which is a more basic and quicker check on your info. See what the online application form is like. Everyone wants quick service and quick approvals after all.
BEST CREDIT CARDS FOR STUDENTS WITH BAD CREDIT
Now let us look at some of the best credit cards for students, and especially for students with bad credit.
Discover It Student Cashback
Even though it is an unsecured card, the Discover It Student Cashback is one of the best credit cards for students. It not only gives you the usual benefits but even rewards you for getting good grades. There are no annual fees with this card which makes it ideal for a student.
APR varies in the 15 to 24% range depending on your profile. If you can get an APR below 20, then that is already better than most other offerings. APR is 0% during the first 6 months of use, which is an incentive that Discover offers.
The Discover It Student Cashback has some neat security features too. It has a FreezeIt feature whereby you can freeze the credit card account if your card gets lost or stolen. You can protect yourself from theft and fraud by freezing the card. You also get zero liability on unauthorized purchases.
The card also has a sweet cashback program which is really a bonus. You can get anywhere from 1% to 5% cash back depending on the details of your purchase. That is not it, Discover goes an extra step in matching your cashback during the first year of use and you get more cash back as a result.
So, if you want to build up your credit and develop good financial habits, then the Discover It Student Cashback is a great option.
Deserve Edu Mastercard
The Deserve Edu Mastercard is open to anyone who wants to start from scratch. It is open even to someone without a social security number. No co-signers are needed. These features make this card quite attractive to domestic as well as international students. For international students, in particular, this option is great because Deserve Edu charges no foreign transaction fee.
This card comes with no annual fee benefit. APR is at around 20-21% which is quite reasonable. Given that this card is for someone with no credit history, the card company checks creditworthiness by looking at bank statements, type of school, and the likelihood of getting a job upon graduation.
Added bonus on this card is a 1% cash back on select purchases, some reimbursement towards Amazon Prime Student account, roadside assistance, and identity theft protection. This card is a great option for a student looking to start building credit from the very beginning.
Journey Student Rewards by Capital One
The Journey Student Rewards card rewards you for making timely payments. It has a cashback program where you can get 1% cash back on qualifying purchases.
Capital One increases cashback by 0.25% whenever you pay your bill on time. It also promotes good financial habits by giving you access to your credit scores through Capital One's CreditWise platform.
You can increase your credit limit after 5 timely payments. The APR on this card is quite high at over 26%. That could be an incentive not to have any outstanding balances as interest charges will end up being quite high for a student with little or no income. If building credit is your goal, then go with this card.
If you are looking to use the card as an additional line of credit or treat it as debt, then this one is not the right choice.
OpenSky Secured Visa Card
OpenSky Secured Visa credit card is the fast approval card. It is known in the industry for having a very quick approval process because it does not require a credit check. Speed is not the only advantage, as a person with bad or no credit will not have to sweat about how the credit card company will view your credit quality. This is a big benefit for students who have limited or no credit profile as they are just starting out.
The OpenSky card is a secured card which means you need to make a security deposit. The minimum amount is $200. APR is quite reasonable at 19.14%. There is also an annual fee of $35. Account information does get reported to the credit bureaus so you can start building your credit with this card. There are no cashback rewards. This card is a simple no frills secured credit card with a reasonable APR and a quick application process to ensure that you have the card in your hand as fast as possible.
Some things to remember
A few guidelines below will help you select the right credit card and use it in a responsible and meaningful manner:
1) Try not to bring in a co-signer: Many people often get a co-signer while applying for a credit card. A co-signer is someone who will take full financial responsibility for the repayment of credit card bills in case you are not able to do so. While there might be nothing wrong with having a parent/relative become a co-signer, the problem becomes quite bad if the credit card bills are way too much for your loved one to pay.
If they do not pay the bills and you do not either, then their credit rating will fall. You need to ask yourself the question whether it is working risking a long-term close relationship for a credit card. In almost all cases, the risk is simply not worth it.
2) Go for secured cards: If you really are going to involve your loved ones in your quest to get a credit card, then there is a lower risk way to do so. No need for co-signers. Simply apply for a secured credit card.
A secured card involves paying a refundable security deposit which is also your credit limit. Either you can pay this deposit yourself or ask your loved one to do so if you do not have enough money. If things go south and you aren't able to pay the bills, then all your loved one (or you) loses is the security deposit. There is no worry about credit downgrading and other problems.
3) Think about credit cards in a positive way: Do not view the credit card as an additional line of credit which can be used as debt. Instead, see the credit card as a way to build up your credit score. Think carefully before drawing cash advances (which come with fees and interest), and do not procrastinate in paying back the dues.
A slip in credit score will hurt you in the long run. You will pay higher mortgage interest, higher auto loan interest will have difficulty getting certain jobs, and may even face trouble getting a cell phone contract. Use a credit card in a constructive manner to build up your score.
4) No big ticket purchases: Do not use credit cards to make large ticket purchases on EMI. The interest rates on credit cards are much higher than loans. Do not pay tuition fees with your credit card thinking that you will avoid an educational loan. In fact, an educational loan has a much lower interest rate than credit card APR. Use the card wisely.
Rudi is a credit analyst who writes articles about credit scores, building credit, and consolidating debt. His know-how on poor credit and credit unions make his input invaluable to our company. There is no credit score out there that Rudi can’t help with.