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Student credit cards and young credit

First credit card dilemma: Student card vs. secured card

You're about to apply for your first card – which one should you choose? Here's how to decide

Summary

Student cards and secured cards are good options for first-time cardholders, but both have pros and cons. Here’s how to decide between them.

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If the time to apply for your first solo credit card has come, you’ll most likely be choosing between a student card or a secured card.

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; keep reading to find out what fits your needs best.

Student cards vs. secured cards: A basic cheatsheet

Student cards

  • These are traditional unsecured credit cards.
  • They 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.
  • The average APR is around 16% – slightly lower than cash back, rewards or credit building cards.
  • You have more options if you want a rewards card.
  • A+: You won’t need a security deposit.

Secured cards:

  • These work like traditional credit card cards.
  • 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% 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+: These are 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,” said 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 said. “I want to get [a short-term loan] from the credit card company.”

Unlike secured cards, you don’t typically need to make a security deposit to get a student card. However, student cards usually start with modest credit limits.

While the median credit limit for Americans is $31,015 (typically spread across multiple cards), the average college student can expect a more modest credit limit. First-time card owners with no credit history typically receive an initial credit line of $500 to $1,500, with some student cards offering credit limits as low as $100.

Low credit limits can be a challenge, as experts recommend never using more than 30% (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 each month anyway. 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% cash back and pays for one year of Amazon Prime Student.
  • The Discover it® Student chrome has no annual fee, gives 2% cash back at gas stations and restaurants (on up to $1,000 in combined purchases each quarter, then 1% for everything else), and pays $20 via statement credit for every year your GPA is 3.0 or higher (for up to five years).

Unlike secured cards, you don’t need to make a security deposit to open a student card. Student cards, however, usually start with modest credit limits.

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,” said Jim Hawkins, law professor at the University of Houston Law Center and a consumer borrowing expert.

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. The Secured Mastercard® from Capital One, 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 said.

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 added.

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,” Fox recommended.

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 road map 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,” Hawkins said. “Better to have a card you’ll keep with you.”

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.”

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? For example, Capital One’s Secured Mastercard 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 an 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.

See related: How a secured card helped my credit score

First credit card essentials

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.
  • 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,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. If you plan to make 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, 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,” Fox said.

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% of your FICO score.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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