Keep your student life carefree by keeping credit card debt at bay.
The pros of having a student credit card are plenty: you get an early start on developing your own line of credit and you get the opportunity to build up a good credit file while freeing up cash flow. You also get to learn how to budget and manage your finances. However, you can sum up the risks that accompany credit card use in one word: debt. This guide will teach you how to steer clear of debt and will also offer some fixes to handle any debt you might already have.
How to avoid debt on your student credit card
Compare your options
Getting the correct card to match your personal spending style and needs is important since this can make a big difference to your monthly bill. Before applying, research and compare low or no annual fee cards, low interest rate credit cards and student credit cards as these card types will help keep your card costs to a minimum. Also ensure that you meet all eligibility requirements since some cards have minimum income requirements and may require co-signers and visas for international students.
Take advantage of low interest rates and interest-free days
Low interest rates or, better yet, 0% purchase credit card promotions can represent substantial interest savings. A 0% purchase card allows you to make and repay purchases without collecting interest for the length of the promotional period, which can last between 3 and 18 months. This interest-free offer will finish at the end of the promotional period and will revert to the standard interest rate. This is usually a much higher rate ranging between 18% and 22%, so it’s wise to repay your entire balance before the promotion ends. Meanwhile, a card with a low ongoing purchase rate can have a rate between 11% and 15%. This could be of more benefit if you want to use the card beyond the promotional period and still want to save on interest costs.
Most credit cards also offer 44 to 55 interest-free days, which can help you avoid collecting interest on future purchases. However, you can only take advantage of interest-free days when you’ve paid your balance in full.
Stick to a budget
Credit cards can be a great way to free up cash flow, but they can also be a temptation to spend. This is why it’s important to create and stick to a budget. Give yourself a monthly spending limit on the card that aligns with how much you can afford to pay in full each month and stick to it. Practice self-restraint by leaving your card at home so you’re not tempted to use it on frivolous things like clothes or alcohol. You can also reduce your credit limit to prevent yourself from overspending. This lays a strong foundation for good money management in the future, and you’ll be glad you did it.
Create a payment plan
As well as creating a budget, it’s just as important to understand how much you have to repay each month. While banks require you to make a minimum repayment of around 2% of your balance amount, you should always try to pay it in full or at least as much as you can. This will help you lower your interest costs and avoid falling into debt.
If you don’t pay at least the minimum repayment, you’ll be charged a late payment fee. Not only will you collect interest and have to pay a fee, but failure to pay your credit card bills is tracked on your credit file and can send negative signals to any future lenders. To ensure you pay your bills on time, you can set up reminders each month to make repayments or create recurring automatic debits to transfer funds to your credit card account.
Don’t use your card for everyday expenses
Unless you’re a high flyer trying to earn max points on your rewards credit card, don’t whip your card out to pay for pizza. You should only use your card for purchases that you’re sure you can repay. This ensures that you know exactly how much you need to repay and you’re not building up your balance with small but frequent transactions.
A good habit would be to use your debit card for daily costs and your credit card for emergency or large-ticket items that you can pay off over time.
Avoid cash advances
If you want to keep your card costs low, avoid using your plastic to make cash advances. Cash advances include ATM withdrawals on your credit card and cash-equivalent transactions, such as buying prepaid cards gift vouchers or store cards. Certain bills and government payments, gambling transactions and banking charges are also viewed as cash advances. While using your credit card to pay these may seem convenient, any of these transactions could attract a cash advance fee (of usually around 3%) and will immediately start collecting the cash advance interest rate (which can be as high as 22%). Cash advances also don’t collect reward points and aren’t eligible for interest-free days. Instead, use your debit card for ATM withdrawals and leave your credit card for purchases.
Tim’s credit card rookie error
After finishing his first year at university, Tim got a new credit card to reward himself. Over the break, he took a road trip with some of his mates and found that using the card was really convenient since he didn’t have to carry any cash around. He swiped his card for food, gas and practically everything he bought. When he needed cash at the hotdog stand, he got some from the ATM using his new trusty credit card. At the end of his vacation, Tim was appalled to see his card balance. He’d spent nearly $2,000 that month without even realising it!
After reading our tips, Tim came up with a plan. First, he used all the cash he had on hand to repay his debt, which took it down to $1,200. Next, he created a monthly budget for himself and set aside $300 each month for repaying the debt. This meant that he had to skimp on food for the next few months, but Tim was committed to his repayment plan. Fortunately, he’d also gotten a card offering 0% purchase interest for six months, which meant he didn’t have to pay any interest on his balance and could successfully clear it in four months. Tim reduced his credit limit to $1,000 after that.
Tips for clearing your credit card debt
If you’ve found this guide a little too late, here are some simple steps you can follow to help clear your credit card debt:
- Pay more than the minimum. While banks only require you to make the minimum repayment of 2%, you shouldn’t base your monthly repayments on this. If you only repay the minimum, the rest of your debt will collect interest and continue to grow each month. You should always pay as much as you can, but paying your balance in full is ideal. If you don’t think you can do this, consider how much debt you have, set yourself a date to clear your debt by and consider how much you’d need to pay each month (plus interest) to repay the entire balance.
- Pay your high interest debts first. This is only relevant if you have multiple debts. In the event you do, paying off the one with the highest interest first ensures that you save on interest costs over the long term. Credit cards automatically direct your repayments towards the debt with the highest interest rate, so that’s also important to remember when making repayments.
- Conduct a 0% balance transfer. If you’re struggling to repay your debt, consider getting a 0% balance transfer credit card to buy yourself some interest-free time. You can use these cards to transfer existing debt to a new card with a promotional 0% rate on balance transfers. After the promotional period ends, a higher revert rate will apply to any remaining balances, so you should do your best to pay the balance in full to avoid interest costs. If you divide your debt by the number of months available in the promotional offer, then you’ll know how much you need to repay each month to clear the debt before the 0% offer ends. So, if you have a $5,000 debt and the promotional offer lasts for 18 months, you’ll need to repay approximately $277 each month to clear the balance in full and avoid interest.
- Negotiate with your credit card provider. Talk to your card company if you’re having difficulty making repayments. They are often open to discussion if you’re experiencing temporary hardship and may reduce or freeze interest fees or agree to a more flexible repayment plan.
- Seek help from a financial counsellor. Financial counsellors can provide free and confidential professional advice, which may be exactly what you need to start solving your money problems. The debt management skills you learn will also prove beneficial in the long run.
Credit cards can be a great way to manage your finances while you’re studying, but if mismanaged, they can plague you long after graduation. Now that you know how to use a student credit card and avoid debt, you can check out our tips on how to successfully apply for a student credit card here.