Credit Card vs Student Loan

17 AUGUST 2023

Deciding on the best fit for financial expansion when you are still finding your feet in the working world can be a daunting process.Person reading a book on a laptop and making notes in a bookTypically, credit cards and student loans are two of the most popular means of financial lending taken out by younger people looking to start their working careers. The question remains – which of these options would be most suitable for you? We’ve got you covered as both options will be explored fully in this article.

What is a Credit Card?

Credit cards enable the cardholder to pay merchants for goods and services based on their overall accrued debt. The bank or credit union that issues the card will create a revolving account that grants the cardholder a line of credit. As a result, the cardholder can borrow money for payment to a merchant or as a cash advance.

What are Student Loans?

Student loans are issued from either lenders, the government or a bank that will be paid back over time, plus interest. These loans are typically used to pay for tuition as well as other educational expenses such as boarding, textbooks, and food. In the case that you require financial aid, the application process would go through your respective university or college.

How to get Credit Card approval

Applying for a credit card is fairly straightforward – fill out your information within the relevant online “application form” and click submit. However, getting approved for a credit card is a lot more tricky. Here are 5 things to keep in mind to give you the best chance of credit approval:

1. Know about credit scores

Your credit score is one of, if not the most important factor that credit card issuers will analyse when considering your application. Approval factors vary from bank to bank, but the general credit scores ranges appear as follows:

  • 300 – 629 = Bad Credit
  • 630 – 689 = Average Credit
  • 690 – 719 = Good Credit
  • 720 and up = Excellent Credit

2. Access your credit scores

Your credit score is assessed using models such as FICO and VantageScore. You are able to access your score online for a small fee or for free, in the event you have a credit card already, FICO offers a free service to view your account.

3. Improve your credit

The overall amount you owe on credit accounts for over 30% of your credit score. Your credit utilisation ratio — which is your balance divided by your credit limit — should be below 30% on each credit card to keep yourself in a positive credit position.

Your credit scores will improve if you:

  • Make payments on time.
  • Keep balances low on existing credit cards.
  • Avoid new debt.

4. Don't apply for the first offer you see

If you have bad credit, it may be difficult for you to get approval for a card that comes with a large sign-up bonus or appealing rewards. Each failed card application slightly affects your score negatively each time, however, there are online tools that enable you to pre-qualify to avoid this scenario.

5. Include all income in the application

Credit card issuers will consider your credit scores an indicator of overall creditworthiness, but these scores don’t reflect your income. Card issuers use your income to calculate your debt-to-income ratio - determining your ability to make payments consistently and on time. You are able to change your ratio by either increasing your income or decreasing overall debt. If you earn income outside your full-time job, include it on your application.

How to get student loan approval

In order to qualify for a student loan, you will have to prove that you have been accepted to study whilst also having someone to serve as surety for paying back the loan.

When applying for a student loan you’ll need:

  • Your ID, as well as your parents’ ID (or ID card)
  • Your parent’s proof of income (latest payslip)
  • Proof of address of your parent
  • Proof of enrolment at a qualified tertiary institution
  • You must be over the age of 18
  • The principal debtor (typically a parent or guardian who signs surety on the loan for you)
  • You must be registered as a student with a tertiary institution in South Africa

The advantages of Credit Cards

Listed below are a few of the benefits associated with credit cards:

  • Convenience: Credit cards allow you to keep cash on hand whilst ensuring you are spending within your limits.
  • Recordkeeping: Credit cards function as a record of your spending and can help with budgeting efforts.
  • Low-cost loans: Credit cards allow you to pay for larger purchases easily, as long as you pay them off at the end of the month.
  • Cash advances: You now have access to money when you need to, giving you increased purchasing power.
  • Member perks: Some credit cards come with rewards such as discounts or cash-back perks.
  • Build good credit history: You can build a good credit score for future credit applications by staying on time with your payments when making purchases.
  • Purchase protection: Credit card purchases are protected in case you need to return a defective product or file a complaint.

The advantages of a Student Loan

It gives you access to what you need when you need it
A student loan caters to your specific, unique needs. It pays for your tuition directly to the institution, whilst your accommodation is also paid directly to your landlord or res. The rest of the funds go directly into your or your surety signer’s bank account.

It gives you flexibility to focus on your studies

If you are a full-time student, you only need to start paying back the full student loan once your studies are complete. In the meantime, the person who signed surety for you will only pay the interest and fees on the loan. This allows you to focus on your studies without having to worry about the financial burdens.

It’s easy to qualify

In order to qualify, you need to be 18 years or older and either be accepted to or studying at an accredited institution. If you’re a full-time student, you’ll need someone to co-sign as surety.

Lower interest rates

Student loans can be paid back with an interest rate as low as 7% interest per annum, which is considerably lower when compared to the interest loans associated with personal loans or credit cards.

It pays for more than just your tuition

In addition to tuition fees, your student loan can pay for your accommodation, as well as the necessary textbooks and equipment required for your studies.

Is a Credit Card or Student Loan better for me as an under 21-year-old?

This will differ from individual to individual. After weighing up the points mentioned during this article, you should have an idea of which of these two options suits you best based on your current situation to make the right steps towards your educational future.