First credit card dilemma: Student card vs. secured card

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 wallet — and on your credit report.

With both cards you can make everyday purchases and 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 a secured card? Fret not — we’ve got you covered.

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

According to Experian data, the average credit limit for Americans is $30,233 (typically spread across multiple cards). The average college student can expect a smaller 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 percent (much lower is even better) of your available credit in any one billing cycle. Otherwise, you could hurt your credit score.

Benefits of student cards

• These are traditional unsecured credit cards. Unlike secured cards, no security deposit is required.
• Age may not matter, as long as you’re a student.
• The average APR is around 17.09 percent.
• Some student cards offer cash back rewards.
• Many student credit cards charge no annual fee.

Drawbacks of student cards

• They usually come with an initial lower credit limit.
• Credit history may be required in order to qualify.
• You must prove you have sufficient income.

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? Some issuers, such as Discover, allot you to 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.

Case for 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.

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 Capital One Platinum Secured Credit Card, 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.

According to Fox, many people think that because they make a deposit, their money will cover purchases until they “reload” the card (just like debit cards, student ID account cards, and gift cards). 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,” Fox says.

After a period of time, if you’ve paid your 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.

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 recommends.

Benefits of a secured card

• Secured cards work like traditional credit card cards. They are easier to get with little or no credit.
• They open up the path to graduate to an unsecured card. If you can establish a positive payment history, your card issuer may extend your credit limit or upgrade you to an unsecured card.

Drawbacks of a secured card

• You make a security deposit as collateral to secure the credit line. Credit lines are usually equal to your deposit, which can be from several hundred dollars up to five figures.
• Issuers keep that security deposit until you close the account and pay off all your charges.
• You must have sufficient income to qualify, despite the deposit.
• Annual fees are common.
• Many secured card issuers run a credit check.

Questions to ask potential issuers when considering a secured card

• What’s required to retrieve your deposit when the time comes, and how long does that take? Issuers’ rules may differ, so it’s important you know this information before you sign up.
• How quickly can you increase your credit limit? It varies; for example, the Capital One Platinum Secured Credit Card gives you the opportunity to be automatically considered for a higher credit line in as little as six months when you make your payments on time and use your card responsibly.
• How easy is it to turn your secured card into an unsecured card? This varies among issuers too. For instance, starting at seven months, the Discover it® Secured Credit Card automatically reviews the account monthly to see if it qualifies for a transition to an unsecured line of credit. If it does, you simply get back the deposit and keep the same card and account.

Bottom line

Remember: Your first card is a keeper. 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 makes up 15 percent of your FICO score.