Credit cards: the devil in disguise?

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Photo by Natloans

Credit cards: great in theory, but not always in real life. For students they might seem like – and in fact are often marketed as – the easy solution to all financial problems, but credit cards are not to be treated lightly. If not chosen wisely and handled responsibly, it is all too simple to quickly end up in serious debt.

For those that aren’t quite sure how they work, a credit card allows you to borrow money up to a set amount (your credit limit) which you’re then charged interest on until you’ve repaid it in full (clearing your balance). The credit limit is decided by the bank based on a variety of factors – for students, it can generally end up at anything between about £300-£1500. Every month, there’s an interest-free period where you have the chance to clear your balance. If you don’t, you’ll be charged at a pre-determined interest rate (your APR). Banks will usually also require a minimum repayment on a monthly basis.

There are of course many perks that come with having a credit card, the most significant of which is the purchase protection you get. If you’ve paid for something above £100 using your credit card and something goes wrong, your credit card provider will cover the costs. Provided you use it responsibly and make your repayments on time, getting a credit card as a student can also help you work towards building up a good credit rating. In the long run, that will help you apply for and ultimately take out more substantial loans like mortgages.

But there are also drawbacks. Credit card providers need to make money and there are many ways for them to do so. The hidden costs cash advances are one example. These can not only apply to ATM withdrawals but also to paying money into other accounts. Often, the handling fees are more than 3% and the individual interest rate charged can be more than 25%. Then there are late fees for when bills don’t get paid on time, fees for returned payments when you exceed your limit and even charges for requesting statements. Needless to say, all of these add up. Only a little bit of carelessness can get expensive quickly.

But even for the incredibly careful – is it really worth it? Despite all the ‘interest free for the first month/year’ offers out there, there are still monthly charges to pay. No matter how small these charges seem, they still add up. The longer it takes to pay the card off in full after a big purchase, the more likely it is you’ll end up paying for that purchase several times over.

Credit cards are designed for those with jobs that have pay cheques coming in every month. Not only do student loans only come in once a term, they’re also significantly smaller. The APR/interest rate, in the meantime, is much higher for students, making it even less economically viable.

Yes, there are the benefits like the credit rating, but there’s really no need to be in such a hurry. Most of us, at least, won’t (or shouldn’t, lacking financial security) be looking to buy a house right after graduation. There’s plenty of time to build up a credit rating after finding suitable employment and those that do will be in a better position to do improve their credit rating anyway: more financial stability means less risk of defaulting a payment than you would have as a student. And regarding purchase safety – there are many options online (from PayPal to Amazon) that offer similar guarantees.

For students, credit cards can mostly be useful as they can help bridge the gap between student loan payments and help fund necessary, emergency purchases or repairs. But for this, the much safer and cheaper option is undoubtedly the, interest-free debit account overdraft many students have access to.

The thing about credit cards is – it costs money to use, money students don’t really have. As such, credit cards should only ever be a last resort. Being financially responsible means facing the facts, thinking ahead and making the best of what you’ve got first and foremost. If, after all that, there’s still a need for more money, get a credit card.