The advice also applies to students – most of whom do not have an independent source of income but want to use credit cards while in college.
The credit card market for students in India is small because most students are financially dependent on their parents and part-time jobs are not common in the country. For these reasons, banks and credit card companies offer very limited options to meet students’ needs, all in the form of secure cards.
In addition to credit cards, some fintech companies offer small loans to students for college-related fees and desirable expenses. A third option available to students is a prepaid card, which is not a form of credit. It functions more like a debit card, but without the bank savings account associated with it.
Credit cards are offered to students in three forms – as a fixed deposit (FD), or bundled with an education loan, or as an additional credit card for parents. With all three options, students are not required to show income or credit score.
Secured card: Banks require FD as collateral on the grounds that the student does not have any income. says Pankaj Bansal, CBO of BankBazaar.com, “Since the card is for assets or investments, or both, the risk to the issuer is not very high.” The locked FD will also earn interest.
The bank requires a minimum FD of Rs 10,000-20,000 and allocates a credit limit of up to 90% of the FD amount. There are other conditions, says Raj Khosla, founder and managing director of MyMoneyMantra.com, “The FD account must be six months old and can be renewed automatically unless the card is cancelled.”
In some cases, banks with which you have a good banking relationship and savings history may also offer credit cards based on savings accounts only. However, in such cases, you cannot apply for a credit card and must wait for the bank to contact you with a pre-approved offer. Kashif Ansari, assistant professor at Hansraj College, University of Delhi, says, “Students may be offered a pre-approved credit card by the bank after keeping Rs 40,000-60,000 in their savings account for about four months.” However, this is not commonly used by banks.
Add-on cards: In add-on cards, the primary cardholder is the parent and their credit limit extends to the student. This means that the responsibility for repayment lies solely with the parent and not the student.
The benefit of this is that the student gets a higher credit limit and greater rewards. “Supplemental credit card holders earn rewards points at the same rate as the primary cardholder,” Khosla says.
However, add-on cards do not help build students’ credit histories because they draw from their parents’ lines of credit, rather than the separate lines assigned to them. “The card will be issued to the primary borrower, given their financial capacity and credit history. This also means that the primary cardholder’s credit score will take a hit if bills are not paid on time,” Bansal said.
Student foreign exchange cards are a good option for students studying abroad. They are prepaid cards that offer benefits such as discounts on excess baggage, free International Student Identity Card (ISIC) membership and reload card vouchers.
Is a regular credit card better?
Student-centric cards have low rewards rates and benefits are only available for expenses that students pay regularly. “Student credit cards are usually concise cards with no annual fees and low credit limits because issuers are unsure if students can be counted on to pay off large balances. The associated rewards are also smaller,” Bansal said.
For example, the waiver of fuel surcharges is the most attractive benefit of most student credit cards. Or, they offer higher cash withdrawal limits of 80-90% compared to the 40-50% offered by regular credit cards. Brand-centric rewards or benefits such as airline miles, dining out or shopping can be ignored.
The purpose of these cards is to get young people into the ecosystem early,” Ansari says. But not many banks find it attractive and are not innovating with such products because they are aimed at people who don’t have an income and don’t spend much money.”
A better option, he adds, is to go with a regular credit card. “If you’re going to use a credit card, it’s best to use one that offers regular spending rewards.” Note, however, that not many banks offer credit card credit scores to 18-20 year olds without income and earnings, even if they are prepared to pledge FD.
Most banks have a minimum age of 21 to apply for a credit card, which may limit your options if you want to get a regular credit card early in college.
Credit cards or microloans
Some fintech companies, such as Paycrunch and Slice, offer lines of credit for students and offer attractive rewards. It’s easier to get a line of credit than a credit card because they don’t require collateral, which offers better returns.
However, these two options should not be confused as they have different structures. While a credit card has a line of credit associated with it, which is actually the maximum amount one can borrow, rather than a loan, a line of credit is a loan approved the moment the borrower signs up for this service (see table).
Paycrunch offers graduating students a UPI-based line of credit that they can use at any merchant that accepts payments using QR codes.PayCrunch founder Aman Bhayana says they determine the line of credit based on the amount of pocket money the student receives. “Our algorithm accesses the applicant’s bank savings and payment history as well as SMS inboxes (for Android users), giving us an idea of how much allowance they regularly receive from their parents. Based on that, we determine the maximum amount of credit to be paid,” Bhayana said.
The total bill must be paid in full by the end of the month, and any defaults are subject to a penalty of 2-3 percent of the outstanding amount. Bhayana says they haven’t charged an interest rate yet because they’ve only been operating for three months, but will soon start charging 2 percent monthly interest.
Currently, players who offer lines of credit to students do not offer interest-free windows.
Many argue that customers with no credit history can use a line of credit to establish a line of credit, which they can then use to obtain a credit card. However, experts advise against lines of credit altogether. “A line of credit is a soft personal loan. A line of credit always comes with a cost, and students in particular should not be burdened with interest because they have no income,” Ansari said. The process of generating a credit report takes six to seven months, which means you will need to utilize your line of credit and pay the associated interest during that time just to get a credit report.
Use caution
Credit cards can be a good starting point for students to instill healthy credit habits. On the other hand, if they don’t use them carefully, they could end up in debt at a very young age. Interest rates on credit card rollover balances can spike as high as 42-45% per year, which is the highest charge of any loan product.
If students use credit cards carefully, they can build a healthy score early, which will help them negotiate better rates for higher education or other loans once they start earning money.
Chetanwala says prepaid cards are a better option for students to start using if they just want to get a head start on using plastic cards.
