Student cards morphing into more general-purpose cards
|2017 STUDENT CREDIT CARD SURVEY HIGHLIGHTS|
According to an analysis of student cards by CreditCards.com, just 10 student credit cards are still available nationwide – down from at least 16 student cards in 2014. Even fewer so-called student cards are designed specifically for college students. Many student cards these days are virtually indistinguishable from cards for older borrowers.
For example, the “student cards” from Bank of America are basically the same cards – with identical terms and benefits – as the BankAmericards offered to other borrowers. They’re just marketed as student cards so young people will be able to easily find them, says Jason Gaughan, a credit card executive with Bank of America.
“These products are the same and work the same, regardless of whether you’re a student or not a student,” says Gaughan. “They’re not quote-unquote student cards.”
Bank of America used to have a credit card that was designed exclusively for college students, but most student borrowers chose nonstudent cards instead, he says.
Similarly, the last remaining Citi card that’s marketed to students, the Citi ThankYou Preferred card for College Students, offers identical rewards as the standard Citi ThankYou Preferred card, but offers a slightly higher APR and less-generous promotions.
Higher rates, more value
Students are also paying more to carry a balance, CreditCards.com has found, thanks in part to federal interest rate increases that have driven up the cost of most cards. Despite charging higher rates, on average, today’s student cards also tend to offer safer terms than most general-purpose credit cards. In addition, many of the cards left standing offer more value than they used to, including bigger sign-up bonuses, free credit scores and credit education tools, bonuses for good behavior and modest card rewards.
“Student credit cards are often initiated with smaller credit lines, and terms can vary significantly, just as they do with general market credit cards,” says Brandy Hadley, a finance professor at California State University, San Bernardino.
Nearly all student cards offer some kind of a rewards program, CreditCards.com has found, and some cards even offer student-friendly perks, such as bonuses in exchange for higher GPAs or lower fees for certain types of purchases.
“One thing I like about some of the student cards is they don’t have foreign transaction fees,” says credit card expert Beverly Harzog. That’s a big deal for international students who travel frequently between countries and for students who study abroad.
But before you settle on a new card, check the card’s terms and conditions and think seriously about what you can afford.
“Young people need to be honest with themselves,” says Hadley. “While rewards, including those for grades, can be beneficial, they often come at the expense of a higher APR.” According to CreditCards.com’s Weekly Credit Card Rate survey, the average student card APR – which only considers a card’s lowest available rate – has climbed to 15.14 percent, up from 13.27 percent in June 2014.
For this year’s student credit card survey, CreditCards.com gathered data on all 10 student cards that are still available to a nationwide audience. Many credit unions also offer student credit cards, but they are typically reserved for students who are credit union members.
Among the survey’s findings:
- Student credit cards offer lower minimum rates, on average, than most credit cards. For example, the average APR for student cards is nearly a full percentage point lower than the national average. But most student cards also advertise a wide range of possible APRs, putting students at risk of being granted a significantly higher rate. Among the 10 cards included in CreditCards.com’s analysis, the average maximum interest rate is 22.41 percent. Meanwhile, the average median interest rate – which is closer to what most students are likely paying – is 18.76 percent.
- Student cards are typically more forgiving than the average general-purpose credit card. Seven of the 10 student cards surveyed don’t charge a penalty rate, so their APRs won’t spike if students repeatedly miss payments. Many general-purpose cards, by contrast, charge penalty rates as high as 29.99 percent.
- Two student cards also waive the credit card’s late fee after the first late payment.
- Student cards are also more likely to waive foreign transaction fees. Five out of 10 student cards don’t charge extra for international transactions.
The more favorable terms are good news for college students, many of whom don’t actually read their credit card’s terms and conditions before signing up for a new credit card. According to an April 2016 survey by the credit agency Experian, nearly half of all students – 46 percent – admitted to skipping over a credit card’s terms and conditions before opening a new account.
According to Experian’s Rod Griffin, students’ laissez-faire attitude toward credit card terms could come back to haunt them if they fall behind on a payment or rack up a significant amount of debt.
“Nearly half of students don’t know what their interest rate is, don’t know the implications for having a late payment are, don’t know what happens when you become seriously delinquent,” he says. “That’s a dangerous situation to be in.”
Gabriel Serna, a professor of higher education at Virginia Tech, says that students are often ill-equipped to handle credit responsibly when they first sign up for new cards.
“Students don’t really understand how credit cards work,” says Serna. “When I worked in banking, one of the things I really worried about was, we were giving credit cards to students who really didn’t understand that not only did they have to pay the balance back, they had to pay interest back.
“Some people didn’t know how to write checks, let alone navigate a consumer credit agreement,” he adds.
Universal emphasis on credit education
To help make up for students’ gap in credit knowledge, banks have poured substantial resources into educating young borrowers about credit.
For example, all 10 of the student cards surveyed offer at least some educational content to student borrowers, such as general personal finance articles, educational videos and infographics. Bank of America, for example, partners with Khan Academy on slickly produced credit education videos, while Wells Fargo offers credit-themed quizzes for borrowers.
According to Bank of America’s Jeff Gaugan, the end goal of these types of credit education initiatives is to produce long-term responsible customers the bank can trust with other loans.
“We want to make sure we do our part making sure they’re educated and not taking on too much debt,” says Gaugan. “Hopefully, then they will come to us when they want to buy a house or buy another car.”
In addition to offering credit education:
- Nine out of 10 student cards offer personalized financial management tools, such as colorful graphs and spending charts, customizable budgeting tools or financial calculators.
- Eight out of 10 student cards offer free text alerts to help students keep up with payment due dates.
- Six out of 10 student cards offer free credit scores. Five cards offer free FICO scores. One card offers a complimentary VantageScore.
- Four cards also offer students extra incentives for good behavior. For example, one card from Capital One offers extra points and automatic credit limit increases in exchange for on-time payments. Two cards from Discover offer a $20 statement credit every year students maintain at least a 3.0 GPA (up to 5 years). Meanwhile, a student card from State Farm offers bonus points when students use their card to pay for car insurance or other insurance coverage from State Farm.
Card issuers’ efforts appear to be paying off – at least for some students. Despite knowing relatively little about credit overall, most students are handling high rate cards relatively well.
According to a 2015 study published by Ohio State, for example, a substantial number of student cardholders – around 47 percent – pay off their credit card balances in full each month. Meanwhile, most student credit card holders who carry a balance owe somewhere between $1 and $999.
Students aren’t carrying wallets full of cards either, says study co-author Anne McDaniel. “The majority of students that have a card, it’s really one or two,” she says. A sizable number of students aren’t even interested in credit cards – or have failed to qualify for one on their own. “I find it noteworthy that 44 percent don’t have credit cards,” says McDaniel. “That’s a substantial number.”
Modest card rewards
According to finance professor Hadley, the recent drop in the number of cards designed specifically for college students may be due, in part, to softening demand. Many younger millennials have famously shunned credit cards and leaned instead on less risky forms of payment, such as prepaid cards and debit.
The Credit CARD Act of 2009 also sharply limited students’ access to credit cards, making it harder for underage borrowers to qualify. For example, students under the age of 21 must prove they earn enough income to pay their loans or have a co-signer jointly apply for a card.
To help attract qualifying students who may otherwise be reluctant to apply for more credit, issuers appear to have stepped up their student card promotions.
- Nine out of 10 student cards offer some kind of a rewards program. Six cards offer cash back, while three cards offer a point-based rewards program.
- Six out of 10 cards offer a sign-up bonus – up from just three cards in 2015.
- Sign-up bonuses for student cards are also more generous, on average, than they used to be. The BankAmericard Cash Rewards for Students card, for example, offers $150 cash back in exchange for spending $500 in the card’s first three months – up from $100 in 2015 – while the BankAmericard Travel Rewards for Students card offers 20,000 bonus points – worth up to $200 in free travel – after cardholders spend $1,000. Meanwhile, the Discover it® Student chrome card and the Discover it® Student Cash Back card match every dollar cardholders earn during their first year.
- Most student cards offer a 0 percent promotional APR on purchases. Four cards offer a 0 percent APR for six months, two cards offer a 0 percent APR for 12 months, one card offers a 0 percent APR for 15 months, and another offers a 0 percent APR for seven months. In 2015, just 6 out of 11 cards offered an interest-free promotion.
- Promotional balance transfer offers are harder to find. Just three cards offer a 0 percent APR on balance transfers – down from four cards in 2015. One card offers a 15-month, 0 percent balance transfer offer. Another card offers a 12-month, interest-free offer and a third offers a six-month, 0 percent balance transfer. Meanwhile, two cards offer a reduced rate on balance transfers for 12 months.
Experts say that, if used responsibly, student cards are a good way to build a credit history before graduation and lay a long-term foundation for your credit score. But be careful not to choose a card you can’t afford.
“There are a lot of mistakes you want to learn from in life,” says Experian’s Rod Griffin. “Credit is not one of them.”
Editor’s note: Card APRs mentioned in this story may have been updated since publication. See the card issuer’s site for the most current offering.