How Students Should Choose the Right Credit Card, Benefit From It

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“Credit cards are for people who are able and intend to repay the full amount on time,” says Harshad Chetanwala, registered investment adviser with Sebi and co-founder of MyWealthGrowth.

The same advice applies to students, the majority of whom do not have an independent source of income, but seek to use a credit card during their university years.

The student credit card market in India is quite small as the majority of students are financially dependent on their parents and part-time jobs are not the norm in the country. For these reasons, banks and credit card companies offer very limited options tailored to student needs and all come in the form of secure cards.

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Besides credit cards, some fintech companies also offer student micro-loans for college-related expenses and ambitious spending. A third option available to students is the prepaid card, which is not a form of credit. It works more like a debit card but without a bank savings account linked to it.

Here are some of the credit options available to students and key things to remember as they prepare to begin their credit journey.

What is offered

Credit cards are offered to students in three forms – against a fixed deposit (FD), or a card bundled with an education loan, or as a complementary credit card from their parents. In all three options, the student is not required to show any income or credit score.

Card against guarantee: The reason why banks ask for a FD as collateral is that students have no income. “As the card is taken against an asset or an investment, or both, the risk for the issuer is not very high,” explains Pankaj Bansal, CBO, BankBazaar.com. The locked FD will also earn interest.

Banks require a minimum 10,000-20,000 FD and assign a credit limit up to 90% of the FD amount. There are additional conditions. “The FD account should be for six months and automatically renewable unless the card is cancelled,” says Raj Khosla, founder and managing director of MyMoneyMantra.com.

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In some cases, a bank with whom you have a strong banking relationship and a savings history may also offer a credit card based on a simple savings account. But, in such a case, you cannot apply for a credit card and you will have to wait for the bank to give you a pre-approved offer. “After the student has maintained 40,000 to 60,000 in the savings account for about four months, the bank can offer a pre-approved credit card,” says Kashif Ansari, assistant professor at Hansraj College, University of Delhi. However, this is not widely practiced by banks.

Complementary Card: In a complementary card, the primary cardholder is the parent and its credit limit is extended to the student. This means that the responsibility for reimbursement rests entirely with the parent and not with the student.

The benefits of this are that the student gets a higher credit limit and greater rewards. “Additional credit cardholders earn rewards points at the same rate as the primary cardholder,” Khosla said.

However, an add-on card will not help build a student’s credit history because they draw money from their parent’s credit limit and not from a standalone limit assigned to them. “The card is issued to the main borrower taking into account his financial capacity and his credit history. It also means that if bills aren’t paid on time, the primary cardholder’s credit rating will suffer,” says Bansal.

For students going abroad for their studies, a student forex card is a good option. It is a prepaid card and offers benefits such as excess baggage discounts, free International Student Identity Card (ISIC) membership and card loading vouchers, among others.

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Is a regular credit card better?

Reward rates on student-focused cards are low, and benefits are only available on expenses that students make frequently. “Student credit cards are usually no-frills cards with no annual fees and low credit limits because the issuer is unsure whether the student can be relied upon to pay off large balances. The associated rewards are also smaller,” says Bansal.

For example, the fuel surcharge waiver is the most attractive benefit of most student credit cards. Or, these offer a higher cash withdrawal limit of 80-90%, as opposed to the 40-50% offered on regular credit cards. Brand-driven rewards or perks for leisure spending, such as airline miles, dining out, or shopping, are negligible.

Ansari says, “These maps were created with the intention of bringing young people into the ecosystem early on. But few banks find it attractive and have not innovated with this product because it is aimed at people who have no income and who will not spend much. »

He added that a better option is to opt for a regular credit card. “If you’re going to use a credit card, it’s best to use one that offers rewards on regular spending” However, note that few banks offer credit cards to 18-20 year olds who don’t have a income and a credit score even if they are willing to hire an FD.

The minimum age to apply for a card is 21 at most banks, which may limit your options if you want to get a regular credit card in your early years of college.

Credit card or micro-credits

Some fintech companies, such as Paycrunch and Slice, offer student lines of credit combined with attractive reward offers. Compared to credit cards, lines of credit are easier to get as they don’t require collateral and the latter offers better rewards.

But, the two options should not be confused as they have different structures. While a credit card comes with a credit limit, which is basically the maximum amount one can borrow and is not a loan per se, a line of credit is a loan given to the borrower. as soon as he registers for this service (see table).

Paycrunch offers a UPI-based line of credit to college students and they can use it at any merchant that uses a QR code to accept payments. Aman Bhayana, founder of PayCrunch, says they decide the line of credit based on how much spending money the student receives. “Our algorithm accesses a candidate’s savings and bank payment history and SMS inbox (for Android users) which gives us an idea of ​​how much stipend they regularly receive. from his parents. Based on that, we decide on the maximum line of credit to be disbursed,” Bhayana explains.

The total invoice must be refunded in full before the end of the month and any default results in a penalty of 2 to 3% of the unpaid amount. Bhayana says they are not charging interest yet as they have only been operational for three months, but will soon start charging 2% monthly interest.

Currently, players offering student lines of credit do not offer an interest-free window.

Many argue that a line of credit can be used by customers with no credit history to create one, which can then be used to obtain a credit card. Experts, however, advise against lines of credit altogether. “A line of credit is a type of personal loan on favorable terms. A line of credit always has a cost and students, in particular, should not bear the burden of interest because they have no income,” Ansari explains. The process of generating a credit report takes six to seven months, which means you will have to use your line of credit and pay the associated interest for that duration just to get a credit report.

Use with caution

A credit card can be a good starting point for a student to instill sound credit practices. On the other hand, they can get into debt at an early age if not used with caution. Interest on credit card rolling balances can be as high as 42-45% per annum, which is the highest of any loan product fee.

If students use the credit card cautiously, they can quickly establish a healthy score that will later help them negotiate a better interest rate on a college loan or other loans once they will start making money.

Chetanwala says if the intention is only to get a head start with plastic, a prepaid card is a better option for students to start with.

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