Consumer Financing vs. Credit Cards: What’s the Difference for Students?

College students face so many financial decisions that can impact their future credit. One poor choice, and they could be paying for it for years: literally.

When faced with a desired online purchase of the latest technology or an unexpected medical or car bill they can’t cover, they may wonder whether it’s better to finance it or swipe a credit card. Understanding the difference between these two options can help them decide the best path to a healthy financial future.

A Closer Look at Credit Cards

A credit card provides a revolving line of credit that can be used, paid off, and then used again. While credit cards provide an easy way to pay for a purchase immediately, it can be easy to fall into credit card debt and fall behind on payments.

Students can typically get approval for credit cards more easily, even with a limited financial history. Consumer financing may be more difficult.

Advantages of Credit Cards for College Students

Major credit cards are taken everywhere, providing an easy way to pay for items and services. They can help students build credit if they are paid on time. Students can earn rewards or cashback on certain purchases. Credit cards can provide a safety net during emergencies.

Disadvantages of Credit Cards for College Students

While credit cards can provide benefits to college students, there are several drawbacks to be aware of:

• It can be easy to overspend and get into debt if there is a high credit limit in place.
• Many cards have high interest rates if they are not paid in full. This results in paying a lot more for an item than its original cost.
• Some have variable interest rates.
• Late fees can add up.
• Many students charge more than they could ever afford, resulting in years to pay back in full.
• If students default on credit card payments or accumulate mounting debt, it can take years to pay off and negatively impact their credit score, affecting future purchases, such as buying a car.

What is Consumer Financing?

Consumer financing also works on the “buy now, pay later” mentality, but differs from credit cards. Unlike credit cards, which provide a revolving line of credit, consumer financing offers a fixed, one-time lump sum with structured monthly payments. The payments are usually evenly spaced with a clear end date.

Financing is common when buying a car and for paying for medical treatments that insurance does not cover. This can include LASIK surgery or braces. Many students see financing as

a way to afford things they might otherwise be unable to buy.

Advantages of Financing Programs for Students

There are several advantages of financing for students:

• Many offer 0% interest introductory periods
• Predictable monthly payments allow for better budgeting
• Difficult to overspend because it is a one-time loan
• Can make emergency or uncovered procedures affordable

Disadvantages of Financing Programs for Students

• Students can face accrued interest on balances of 0% purchases once the introductory period is over.
• Lack of repayment flexibility
• Potential hidden fees

Students need to read the fine print on all financing options to avoid paying hidden fees or unwanted interest. When they don’t, they may have to deal with high costs they can’t afford.

When Should Students Choose a Credit Card and When to Choose Financing

Students who want to build credit slowly and can afford credit card payments can benefit most

from choosing credit cards. Those who can pay their balance in full every month will get the most benefits as they build their credit. But few students are in the financial position to do this.

This is why it’s often best to only charge what you know you can afford to pay off next month.

If a student has a specific large expense or a medical procedure, they may benefit most

from a consumer financing plan. Those who need a structured plan to pay it off during a set time are often best suited for these plans.

Since these are structured, students know exactly what they have to pay and when.

FAQ About Credit Cards and Consumer Financing

Still have questions about credit cards and consumer financing? Read on for more questions and answers.

What is APR?

APR is the Annual Percentage Rate. It is the interest applied to your balance if you carry it over from one month to the next.

Are there credit card fees?

Yes, credit cards typically have some fees. Common fees include annual fees, late payment fees, balance transfer fees and cash advance fees.

What questions should borrowers ask before signing a financial agreement?

Always check the interest rate, the total loan terms, and any consequences you may face for missing payments, whether it is a fixed or variable rate.

Does everyone who applies for financing get approved?

No, approval is not guaranteed. It is based on risk assessments.

What should students look for in a credit card?

Students should look for cards with no annual fee. You should never pay a yearly fee for a basic

starter card. Cards that offer 1% to 3% cash back on select purchases can also benefit college students. Look for fraud protection as well. This offers $0 liability if a card is lost or stolen. This is a good idea for students who tend to lose things.

The Bottom Line

When you look at the big financial picture, it’s important to remember that consumer financing is intended for a specific cost, while credit cards are always there to use. Credit replenishes with credit cards once it is paid off; consumer financing typically does not.

Some benefits and dangers come with each option. Many students can fall into credit card debt if they’re not careful, while those choosing the financing option may end up paying accrued interest when introductory periods end.

Identifying the item or service to be paid for can help guide students in the right direction

so they don’t get stuck in a financial trap. Being vigilant of credit card due dates and interest rates, as well as financing pitfalls, is crucial for students to establish a solid financial future.