BackHow students should choose the right credit card, benefit from it
Here are the credit options available for students as they gear up for their college, start their credit journey
PremiumThe upsides of using a credit card are well-known and include building a healthy credit score, making spends rewarding and learning about good credit practices. Yet, what is the right age for a person to apply for a credit card? And, who should apply for one?
“Credit cards are meant for people who are in a position, and have the intention, to repay the full amount in time," says Harshad Chetanwala, a Sebi-registered investment adviser and co-founder, MyWealthGrowth.
The same advice applies for students–a majority of whom don’t have an independent source of income but are looking to use a credit card during their college years.
The credit card market for students in India is quite small because the majority of students are financially dependent on parents and part-time jobs are not a norm in the country. For these reasons, banks and credit card companies offer very limited options that are tailored to students’ needs and all of these come in the form of secured cards.
Apart from credit cards, some fintech companies also offer micro loans to students for both college-related expenses and aspirational spends. A third option available to students is prepaid cards, which is not a form of credit. It functions more like a debit card but without a bank savings account linked to it.
Here are some of the credit options that students have and the key things to remember as they gear up to start their credit journey.
What’s on offer
Credit cards are offered to students in three forms—against a fixed deposit (FD), or one bundled with an education loan, or as an add-on credit card of their parents. Under all three options, the student is not required to show an income or a credit score.
Card against collateral: The rationale behind banks asking for an FD as a pledge is that students don’t have any income. “As the card is taken against an asset or investment, or both, the risk for the issuer is not very high," says Pankaj Bansal, CBO, BankBazaar.com. The locked-in FD will also earn interest.
Banks ask for 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 must be six months and automatically-renewable unless the card is cancelled," says Raj Khosla, founder and MD, MyMoneyMantra.com.
In some cases, a bank with which you have strong banking relations and savings history may also offer a credit card on the basis of just a savings account. But, in such a case, you cannot apply for a credit card and will have to wait for the bank to approach you with a pre-approved offer. “After the student has maintained ₹40,000-60,000 in the savings account for about four months, the bank may offer a pre-approved credit card," says Kashif Ansari, assistant professor at Hansraj College, University of Delhi. However, this is not widely practised by banks.
Add-on card: In an add-on card, the primary cardholder is the parent and their credit limit is extended to the student. This means that the repayment liability squarely lies with the parent and not the student.
The benefits from this are that the student gets a higher credit limit and bigger rewards. “Add-on credit cardholders earn the reward points at the same rate as that of the primary cardholder," said Khosla.
However, an add-on card will not help build the students’ credit history as they are drawing money from their parent’s credit limit and not a standalone limit assigned to them. “The card is issued to the primary borrower taking into account their financial capacity and credit history. This also means if bills are not paid on time, the primary cardholder’s credit score will take a hit," says Bansal.
For students going abroad for their education, a student forex card is a good option. They are a prepaid card and offer benefits such as discounts on excess baggage, free International Student Identity Card (ISIC) membership and vouchers on loading the card, among others.
Is a regular credit card better?
Reward rates on student-focused cards are low and benefits are available only on expenses that students frequently make. “Student credit cards are usually no-frills cards with no annual fees and low credit limit, as the issuer isn’t sure that the student can be depended upon to pay back big balances. The associated rewards are also smaller," says Bansal.
For instance, waiver of fuel surcharge is the most attractive benefit of most student focused credit cards. Or, these offer a higher cash withdrawal limit of 80-90%, as opposed to 40-50% offered on regular credit cards. Brand-focused rewards or benefits on leisure spends, such as air miles, eating out or shopping are negligible.
Ansari says “These cards were started with the intention to get youngsters into the ecosystem early. But, not many banks find it attractive and have not innovated with this product as these are targeted at people who don’t have an income and won’t spend much."
He added that a better option is to opt for a regular credit card. “If you are going to use a credit card, it’s better to use one that offers rewards on regular spends" However, take note that not many banks offer credit cards to 18-20-year-olds who do not have an income and a credit score even if they are ready to pledge an FD.
The minimum age to apply for a card is 21 years at most banks, which may limit your options if you want to get a regular credit card in the early years of college.
Credit card or micro-loans
Some fintech companies, such as Paycrunch and Slice, offer credit lines to students bundled with attractive reward offerings. Compared to credit cards, it’s easier to get credit lines 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 has a credit limit linked to it, which is essentially the maximum amount one can borrow and is not a loan per say, a credit line is a loan sanctioned to the borrower the minute they sign-up for this service (see table).
Paycrunch offers a UPI-based credit line to students pursuing graduation and they can use this at any merchant that uses a QR code to accept payments. Aman Bhayana, founder, PayCrunch, says they decide the credit line based on the pocket money that the student is getting. “Our algorithm accesses an applicant’s bank savings and payments history and SMS inbox (for Android users) that gives us an idea of how much allowance they regularly get from their parents. Depending on this, we decide the maximum credit line to disburse," says Bhayana.
The total bill has to be repaid in full before the month- end and any default attracts a penalty of 2-3% of the outstanding amount. Bhayana says they don’t charge an interest rate yet as they have been operational only for three months but will start charging 2% monthly interest soon.
Currently, players offering credit lines to students don’t offer an interest-free window.
Many argue that a credit line can be used by customers with no credit history to build one, which can then be used to get a credit card. Experts, however, advise against credit lines completely. “A credit line is a type of soft personal loan. A credit line always comes with a cost and students especially shouldn’t take up interest burden as they do not have an income," says Ansari. The process to generate a credit report takes six to seven months, which means you will need to utilise your credit line and pay associated interest for this duration just to get a credit report.
Use with caution
A credit card can be a good starting point for a student to inculcate healthy credit practices. On the flipside, they can get indebted at an early age if not used prudently. Interest on rollover balance on credit cards can balloon up to 42-45% annually, which is the highest any loan product charges.
If students use the credit card prudently, they can build a healthy score early which will later help them negotiate a better interest rate on an education loan for higher studies or other loans once they start earning.
Chetanwala says if the intention is only to get a headstart with plastic, a prepaid card is a better option for students to start with.
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