How to avoid massive student credit card debt

Information verified correct on March 28th, 2017

Get the lowdown on getting rid of student debt.

Imagine being in your late 30s and still clearing payments for a slice of pizza you bought when you were a university  student. This sure might sound crazy, but credit card debt can be easy to build and difficult to erase. Educating yourself about responsible credit card use can save you from digging yourself out of debts years after graduation.

How easy is it to fall into credit card debt?

A major reason why many students fall into credit card is due to their spending habits. Having a credit card during your early university years can coincide with a time where your financial knowledge is still limited. As time passes, students are also exposed to the various ways of having fun and having the money to afford certain things they want.

Sooner or later many students will get into the habit of splurging on entertainment, food or a lavish party, and if these purchases are paid for using a revolving line of credit such as a credit card, you can have a recipe for disaster.

Sheena's story

Sheenas sory  - case study When 18 year old Sheena entered university, little did she know she had become a fresh target for credit card providers. After much persuasion from a representative of the credit card issuing company, Sheena filled out an application for a credit card, and a few weeks later she received the card.

In no time, Sheena started using her plastic money partying with her friends and binging on the priciest food. When she finally realised that she had exceeded her limit and had entered into the defaulter's bracket, she applied for more cards. This was both to pay off the balance on the previous card and continue with her partying.

By the time Sheena finished her first year, she had amassed more than $5000 worth of debt. Because of this, Sheena dropped out of university to get a job to pay off her debt and support her day-to-day lifestyle. It may take years for Sheena to pay off her debts, but even longer to treat her damaged credit and intellectual history.

There are a number of reasons why getting into debt while in university is bad:

  • You push other goals you may have had back, such as buying a property or travelling because your money is going towards paying off your balance
  • You're more than likely not in a stable or well-paying job which can provide you with enough cash to pay off your debt
  • Your credit file can get adversely affected if you end up with defaults on your account, making it harder for you to get a loan or credit card in the future

How to avoid credit card debt as a student

The fact that you're reading this article means two things: you're either serious about avoiding debt as a student or you're already in debt. If you're part of the latter you may wish to come back to this part later after reading the next section.

The student credit card cheat sheet

If you want to avoid credit card debt to begin with it helps to understand a bit about how credit cards work.

A credit card is a revolving line of credit. This means each month provided you haven't reached your credit limit, you can continue spending. If you pay your balance off you can continue spending up to the amount of your credit limit.

A credit card usually gives you a certain number of interest free days each month. If you pay your balance off within this time frame you won't pay interest. If you fail to pay off your balance within this time your purchases will start to get charged interest each day. You'll also lose your interest free days until you pay off your balance.

What does 55 days interest free really mean?

The last thing you need to know about is how minimum repayments work. When your balance is due at the end of each statement cycle you'll need to pay the minimum repayment. This can be as small as 2-3% of the balance or $10. If you only pay this the debt could take years to pay off and the amount you spent on interest would be huge.

Even just $500 on which 20% interest is charged would cost $1,082 and take nine years to pay off with minimum repayments of 2% or $10.

If you have a credit card and you're a student, you can avoid this by doing the following;

  • Ensure you keep a low credit limit to minimise the amount you can spend and prevent you from going overboard.
  • Only purchase items you have the money to pay for. This is the most important of these tips and ensures your credit card is used only as an emergency source of funds.
  • Avoid cash advances. These have no interest free period and usually always have an interest rate above 20%. Remember that various transactions are classified as cash advances such as gambling, buying foreign cash and withdrawing cash from an ATM.
  • Establish a budget. This is the oldest trick in the book and for good reason. Making a budget will show you exactly how much you earn and how much you spend. This will ensure you don't spend more than you can afford.
  • Use alternative forms of payment. Debit cards give you all of the payment flexibility of a credit card, so if you don't actually need a credit card don't tempt yourself by getting one.

How to pay off credit card debt

Even if you follow the above recommendations you may still fall into credit card debt. Maybe you had a number of unexpected text books which you had to buy, or urgent car repairs.

Whatever the reason may be, you can pay off your credit card in a number of ways.

  • Carry out a balance transfer.

    A balance transfer simply involves you moving your balance from one credit card to another, but with the notable difference being the new credit card has a lower interest rate. This means you can pay your balance off easier than if you were paying it off with high interest charges. Some balance transfer offer rates can be as low as 0% p.a., meaning you can get a real head start on paying your balance off.

  • Start a budget.

    You can pay off your debts by finding out exactly how much money you're making vs the amount you're spending. This will help you find out how much you can spend towards paying off your debt.

  • Pay more than the minimum

    In our example above the $500 we needed to pay would take us nine years if we stuck to minimum repayments. If we added $100 per month to our repayments we could pay off this same balance in six months and only add $17 in interest.

  • Follow a debt strategy

    If you have more than one credit card you may want to employ a strategy like the debt snowball strategy. With this strategy you order your debts from smallest to biggest. Then you focus on the smallest debt and put as much as you can towards paying it off. Once this is done you move to the next debt, although this time you also use the money you were using to pay off the first debt. You simply keep repeating this, paying off more debts and using the money from previous debts to increase the amount you're putting towards paying off your debt.

How to correctly choose a credit card when you're a student

Choosing a credit card when you're a student isn't difficult. A student typically has a lower income, so the number of cards available are limited. Still, there are different types of cards to choose from.

Low purchase rate cards. These cards are generally no-frills credit cards which have a low ongoing rate for purchases. This means if you're stuck paying off a balance you'll be paying 8-14% rather than 17-21%.

  • Rewards cards - There are a small number of rewards credit cards with low or no annual fees and low income requirements. Care should be taken with these as they generally have higher purchase rates.
  • No annual fee cards - Another type of card available to students is the no annual fee credit card. This is also a typically no-frills credit card which doesn't charge annual fees. Some may have higher interest rates to make up for the absence of an annual fee, or may have a lower amount of interest free days.

Whichever card you choose, ensure it suits the way you wish to use your credit card. All of the cards above may be offered from time to time with purchase rate of balance transfer offers, so be sure if you need to make a large purchase for example, that you take advantage of a low purchase rate offer so you can pay it off.

If you plan to pay off your purchases in full each month you may look for a card with a high number of interest free days.

Regardless of the card type you're interested in, it's a good idea to go for a card with a low annual fee.

Also, be sure to read the minimum requirements for a card, as some may have high income requirements or if you're an international student, may not accept 457 visas.

Finally, remember each credit card application is stored on your credit file. Even if you're rejected this will appear on your file, so approach each application carefully.

Credit cards are a privilege that you should treat with responsibility. Ensure you understand how they work before you fall into the debt trap.

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2 Responses to How to avoid massive student credit card debt

  1. Default Gravatar
    | July 15, 2013

    I will be going on exchange next month and I was thinking about getting a credit card, possibly a student credit card as a backup if all my money on my travel money card runs and I need to support myself for a few weeks till I arrive back in Australia. Would be a good idea to get a credit card if I run out of money? If I do get a card, which one would you recommend? I’m with Commonwealth so their offer looks pretty good. Lastly, I’ll only be a student for a semester more after I come back so it worth just getting a low rate card rather than s student one?

    • Staff
      Jacob | July 15, 2013

      Hi Georgina. Great question. If you’re looking for a source of short terms cash, a credit card can be a good option, and short of a personal loan, there are not many other options. Truth be told, there’s little difference between student and low rate credit cards. The Commonwealth Bank Student Credit Card is a good option; however, if this is your last year studying, this is the last year you’ll be eligible for the card, and you need to keep providing your student number to the lender to prove that you’re enrolled to keep receive the benefits of their student product. You can compare cards with no annual fee on this page. Look for the cards with a low purchase rate of interest, they’re comparable to student credit cards.

      Finally, if you’re travelling overseas, it’s worth having a look at our travel money comparison page. The credit cards on this page do not change cross currency conversion fees. This is a fee of a couple of a percent of the total value of the transaction you will get charged when you make a purchase or you withdraw money from an overseas ATM. To cut down on card fees when you’re overseas, it helps to plan how you’re going to access your cash. Both travel money cards and some credit cards will charge a fee when you withdraw from an ATM – the local ATM provider may also charge a fee, and in some cases you can end up paying as much as $10 when you withdraw cash (excluding currency conversion fees and cash advance fees and interest rate if you’re using your available credit).

      Let us know if you need more information on this topic.

      I hope this helps.


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