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8 Mar 2020

Student credit cards: are they ever a good idea?

Find out how seven student credit cards stack up

Students who struggle to make ends meet may need to look for alternative borrowing options to get through the year, and some banks offer credit cards that can pick up the slack. But are they a good idea?

Many studying don't receive enough funding to cover basic living expenses. But for some, boosting income with a job or other funding such as bursaries or income support may not be possible, so borrowing could be their only option.

Here, Which? looks at what credit cards are available specifically geared towards students and how to manage them safely, plus how overdrafts and 'buy-now-pay-later' deals compare.

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Credit cards just for students

Many students won't have had a credit card before and may think they can't get one because they don't have a steady or sufficient income.

However, Which? analysis of Moneyfacts data shows that seven banks have cards specially designed for students.

BankName of cardMaximum credit LimitInterest rate (APR)Eligibility criteria
AIB NIAIB Student Mastercardn/a - based on ability to repay12.9%Available to current account holders
Bank of Ireland UKUK Student Mastercard£35017.9%n/a
HSBCStudent Credit Card Visa£50018.9% or higherHSBC student account holders only
NatWestStudent Credit Card Mastercard£50018.9%Student account holders only
Royal Bank of ScotlandStudent Credit Card Mastercard£250 to £50018.9%Student account holders only
Ulster BankStudent Mastercard£35018.9%Student account holders only
TSBStudent Mastercard£500 to £1,00019.9% or higherTSB student current account holder for a minimum three months

Source: Moneyfacts 3 March 2020.

How student credit cards differ to other cards

There are a few key differences between student credit cards and deals open to all borrowers.

Income flexibility

According to Moneyfacts, you don't need a minimum income to apply for the seven student credit cards we found.

This makes them attractive because other credit cards that students might consider such as ones with long introductory periods of 0% or low interest rates usually require a minimum yearly income of £5,000.

However, even if you don't have earnings, banks are likely to take into account what the Student Loans Company gives you to live on, plus any household contributions or other funding.

Credit limits will be lower

One of the key differences between student cards and others is that your credit limit will be relatively modest and will reflect your individual ability to repay.

The cap on spending is typically set at hundreds of pounds rather than thousands.

The APR is competitive

Unlike other deals that newcomers to credit cards might have to consider, such as ones for people trying to develop or improve their credit history, student credit cards offer lower rates.

Typically, student cards charge an Annual Percentage Rate (APR) of just under 20%, although Allied Irish Bank in Northern Ireland (AIB NI) asks much less at 12.9%.

In comparison, cards for those with a poor or non-existent credit history, which in theory would be what the majority of students will need to go for, charge APRs that can be as high as 60%.

Deals are linked to student accounts

To be considered, typically applicants must hold a student bank account at the bank in question. The exception is the Bank of Ireland where the card is available to new customers.

In a concession to students, though, none of these cards charges a fee simply for holding the card, although there are other fees to watch out for such as going over your spending limit or having insufficient funds to pay your bill.

No frills borrowing

As banks are being careful not to encourage you to be a high-rolling big spender, don't expect any perks such as rewards or cashback.

These are after all fairly basic cards and only HSBC's offers a few extras, such as discounts and offers on shopping.

How student credit cards work

Even though some, especially those in Scotland, embark on student life before the age of 18, none of these cards are available until you reach that milestone.

All of the accounts can be opened online, by phone or in branch apart from the TSB and AIB cards, which must be opened in branch. Once open, all can be managed online or by post, phone or mobile app.

Importantly, for travel lovers, all the cards can be used abroad. However, all charge 2.75% per transaction, while HSBC charges 2.99%.

You should aim to pay off your card in full, on time every month - if you can't, you'll have to pay a minimum off. This will usually range between 1% and 3% of what you owe, or a set minimum, whichever is higher depending on the bank.

As with many mainstream cards, the headline rate advertised isn't always the one you'll be charged even if your application is accepted. At HSBC and TSB, you could pay a higher rate because the bank considers you to be more of a risk.

Whatever rate you're given will be variable, meaning that the bank can change what it charges, but will have to give you notice of this.

Student credit cards and money transfers

Generally, you should avoid using any credit card to withdraw cash because the interest is charged instantly and usually at a much higher rate, and the firm could record it on your credit report.

However, there are a handful of deals that will put a lump sum into your bank account via what's known as a money transfer.

This can be tempting, but any cash via a credit card is costly. Of the student credit cards, only three offer this facility: NatWest, Royal Bank of Scotland and Ulster Bank and they all charge interest immediately. The rate is 18.95% a year - a fairly lenient rate compared with non-student cards, but nonetheless, it will still mount up.

The NatWest deal, for example, will allow you to do a money transfer worth 95% of your overall credit limit. So of a £500 limit, you could move £475 into your account.

Although you can combine buying items and a money transfer, you won't be allowed to exceed your single credit limit.

How a student credit card compares with an overdraft

Although the lure of extra money for purchases or a cash injection might make a credit card appealing, it's going to be expensive compared with using your free student overdraft.

A credit card should only be used if you have maxed out on your free overdraft and the overdraft rate you will be charged is more expensive than the credit card rate.

Only the Bank of Ireland card offers interest-free credit, but this is just for the first three months and then its rate goes up to 17.9%, just under most of the others.

How credit cards compare with 'buy now, pay later'

One of the biggest temptations to overspend that faces young people are the 'buy now, pay later' facilities on multiple online shopping sites.

These allow you to delay paying for purchases on things such as clothes for a month, or to split the payments into three to make them more manageable.

However, if you're new to borrowing you may find taking out mini loans with multiple retailers and payment platforms are hard to keep track of.

They may present more of a challenge than a single credit card to mastering the essential skills of managing any credit, which is repaying on time.

The pros and cons of a student credit card

Credit cards can give you some extra spending power to ease temporary shortfalls in funds when you're in a tight spot, and if you pay your bill every month you won't have to pay any interest.

However, they can also lead to debt, so you should carefully consider if you really need one and have a plan to pay what you borrow back.

If you can't, you will still have to pay either a minimum amount or what you can afford, and interest will be added to your outstanding balance.

If you choose to pay the bare minimum, you could be paying it off for years and now, credit card companies have to take action to prevent people from falling into long-term debt like freezing cards.

Debt can mount up considerably and a large outstanding balance that you only pay the minimum amount due could impact your credit history and harm your future ability to borrow money.

That said, a credit card can also be a valuable introduction to the personal responsibilities and pitfalls surrounding credit where the potential for damage has deliberately been ring-fenced.

But one of a card's greatest values may come once you stop being a student. As most students have little or no credit history, a credit card is one way to build a track record. If well managed, a credit card can prove its worth by opening the door later on to better rates on loans, other credit cards and mortgages.

Where to find help if you're struggling

Before you take on any borrowing, you should consider other funding available specifically for students:

  • UniversitiesMost institutions offer scholarships, bursaries, grants for studying abroad, hardship help and care leaver support.
  • Government If you're on a low income, have children or dependent adults, mental or physical disabilities, or learning difficulties such as dyslexia, you could be eligible for support.
  • Course-specific help Specialist courses such as becoming a nurse or teacher often offer bursaries.
  • Charities Visit Turn2usgrantsearch to see your options.

Find out more:university bursaries and scholarships