First credit card dilemma: Student card vs. secured card
Both can offer rewards and build credit; here's how to pick the right one
If you’re new to credit and don’t know the difference between them, don’t worry. Both types of cards look exactly like any other card in your hand – and on your credit report.
With both cards you can make everyday purchases, as well as begin to build a credit history. This will be key when you want to apply for a car loan, a mortgage or even rent a new apartment.
Should you get a student card or secured card? Fret not – we’ve got you covered.
Student cards vs. secured cards: A basic cheatsheet
- Traditional unsecured credit cards.
- Usually come with an initial lower credit limit.
- You may need some credit history in order to qualify.
- You must prove sufficient income, too.
- With some cards, age may not matter, as long as you’re a student.
- Average APR: 15.92 percent – slightly lower than cash back, rewards or credit building cards.
- More options if you want a rewards card.
- A+: No security deposit necessary.
- Work like a traditional credit card
- You make a security deposit as collateral to secure the credit line.
- Issuers keep that security deposit until you close the account and pay off all your charges.
- Credit lines are usually equal to your deposit, from several hundred dollars, up to five figures.
- APRs run the gamut from as low as 9.99 percent and up.
- You must have sufficient income to qualify, despite the deposit.
- Some require credit history.
- Many secured card issuers run a credit check.
- A+: Easier to get with little or no credit.
The case for a student card as your first credit card
“I would be more strongly in favor of the well-researched student card,” says Jonathan Fox, professor and director of the financial counseling clinic at Iowa State University. The reason: “I don’t want to give someone an interest-free loan [of a security deposit],” he says. “I want to get [a short-term loan] from the credit card company.”
Unlike secured cards, to get a student card you don’t need to make a security deposit. However, student cards usually start with modest credit limits. College students have an average credit limit of $1,322 on their credit cards, according to a 2017 study by Student Monitor. The initial credit limits on student cards averaged $874.
This can be a challenge, as experts recommend never using more than 30 percent (much lower is even better) of your available credit in any one billing cycle. Otherwise, you could hurt your credit score.
Smart money: Keep a low credit utilization – the amount you have borrowed compared to your credit limit, and the second most important credit scoring factor after timely payments – by charging something small you would have purchased anyway each month. Then pay off the bill in full.
Some student cards also offer benefits and rewards:
- The Deserve Edu Mastercard for Students, for example, has no annual fee, gives 1 percent cash back and pays for one year of Amazon Prime Student.
- The Discover it® Student chrome has no annual fee, gives 2 percent cash back for gas and restaurants (1 percent for everything else), and pays $20 for every year your GPA is 3.0 or higher.
Questions to ask potential issuers when considering a student card:
- Who qualifies for a student card, and do you fit that profile? Issuers will verify your enrollment during the application process.
- How long can you retain a student card? With some cards, such as Discover, you can keep a student card for life.
- If you want a higher credit limit later on, how does that work? It can vary widely depending on the card, and the applicant.
The case for considering a secured card as your first credit card
If you have the money, “I think that I’d go with the secured card,” says Jim Hawkins, law professor at the University of Houston Law Center and a consumer borrowing expert.
Video: 4 ways students can build credit
One big advantage: You control the credit line. Since the credit line is determined by – and often equal to – your security deposit, you and your wallet pretty much set that limit.
But some secured cards may give you a little more leeway. Capital One’s Secured Mastercard, for instance, sets the initial credit limit at $200. But the security deposit is $49, $99 or $200, depending on your credit history and credit score.
One potential downside of secured cards: Because you pony up a deposit, many believe that money will cover purchases until they “reload” the card (similar to how debit cards, student ID account cards and gift cards work), Fox says.
Instead, users need to realize that the security deposit simply puts the card in their hands. And they need to pay for any purchases they make on the card – in addition to that deposit, he says.
If you’re shopping for a secured card, “the most important thing is to get the best secured card that will convert to an unsecured card and refund that deposit,” says Fox.
After a period of time, if you’ve paid bills in full and on time, you should have a pretty solid credit score. So, what’s the issuer’s roadmap for getting you an unsecured card?
- Not every card converts. And there’s no norm when they do. Some card issuers will automatically start evaluating you for an unsecured account after a certain number of months.
- Others make you ask. And some require that you apply for one of their unsecured cards and close the secured account to regain your deposit.
“Closing a credit account is not great for your credit score,” says Hawkins. “Better to have a card you’ll keep with you.”
A few smart secured card shopping questions:
- What’s required to retrieve your deposit when the time comes – and how long does that take?
- How quickly can you increase your credit limit? Capital One’s Secured Mastercard, for example, gives you access to a higher credit line after making your first five payments on time.
- How easy it is to turn your secured card into a unsecured card? For example, after eight months, the Discover it®: Secured card reviews the account monthly to see if it qualifies for transition to an unsecured account. If it does, you simply get back the deposit and keep the same card and account.
First credit card essentials
No matter whether you get a student card or secured card, there are a few critical things you need to know before you apply:
- Credit reporting. Some creditors notify only some credit bureaus or report only bad behavior. But plenty of issuers report good behavior to all three bureaus every month. Don’t settle for less.
- APRs. The APR isn’t that important, as long as you never carry a balance. “You’re not going to care about the interest rate because you’re going to pay it off each month,” says Ira Rheingold, executive director of the National Association of Consumer Advocates. However, if you do plan on making a larger purchase that you pay off over time, the APR will matter, a lot.
- Fees: In addition to checking out interest rates, study the fee schedule. Ideally, you want no application or annual fees. But also look at foreign transaction fees, balance-check fees, late fees and other issuer service charges. Fees can add up fast.
- Tech/customer service. Shop the quality of the issuer’s tech services, too, says Fox. And test-drive customer service. Is it easy to reach a helpful human? Or is it a maze of voicemail options with 20-minute hold-times?
Scope out online customer card reviews, too. “Read what people are complaining about, and if that scares you, move on,” says Fox.
Remember: Your first card is a keeper
Regardless of which type of card you apply for, this will be your first card.
While you’re likely to graduate to a more grown-up card in the future, you’ll want to keep your first card open for a long time. Closing your oldest card can impact your length of credit history, which accounts for 15 percent of your FICO score.
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