First Credit Card Dilemma: Student Card vs. Secure Card

When it’s time to apply for your first individual credit card, you will most likely choose between a student card or a secure card.

If you are new to credit and don’t know the difference between the two, don’t worry. Both types of cards look exactly like any other cards in your wallet and on your credit report.

With both cards, you can make everyday purchases and start building your credit history. This will be key when you want to apply for a car loan, mortgage, or even rent a new apartment.

Should you get a student ID or secure card? Don’t worry, we’ll have your back.

Student ID holder as first credit card

“I would be more supportive of a well-designed student ID,” says Jonathan Fox, professor and director of the Iowa State University Financial Counseling Clinic.

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 a credit card company.

Unlike secure cards, you usually don’t need to pay a deposit to get a student card. Note, however, that student cards usually start with modest credit limits.

According to Experian, the average credit limit for Americans is $30,233 (usually spread across multiple cards). The average college student can expect a lower credit limit. New cardholders with no credit history typically receive an initial line of credit of $500 to $1,500, with some student cards offering credit limits as low as $100.

Low credit limits can be a problem, as experts recommend never using more than 30 percent (less is better) of available credit in any billing cycle. Otherwise, you can harm your credit history.

Benefits of student cards

• These are traditional unsecured credit cards. Unlike secure cards, no deposit is required.
• Age may not matter if you are a student.
• The average annual rate is about 17.09 percent.
• Some student cards offer refunds.
• Many student credit cards do not charge an annual fee.

Disadvantages of student cards

• They usually come with an initial lower credit limit.
• A credit history may be required for confirmation.
• You must prove that you have sufficient income.

Questions to ask potential issuers when considering student ID

• Who is eligible for a student ID card and do you fit this profile? Issuers will verify your registration during the application process.
• How long can a student card be kept? Some issuers, such as Discover, allow you to keep your student ID for life.
• If you want to increase your credit limit later, how does it work? It can vary widely depending on the card and the applicant.

Secure card case as your first credit card

If you have the money, “I think I’d go for a secured card,” says Jim Hawkins, a law professor at the University of Houston Law Center and consumer credit expert.

You control the credit line. Because the line of credit is determined by—and often equals—your security deposit, you and your wallet pretty much set that limit.

But some protected cards can give you a little more leeway. For example, the Capital One Platinum secured credit card has an initial credit limit of $200. But the 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 “top up” the card (just like debit cards, student ID cards, and gift cards). Instead, users should understand that the pledge simply puts the card in their hands. And they need to pay for any purchases they make with the card — in addition to that deposit,” he says.

If you buy a secured card, “the most important thing is to get the best secured card, which will be converted to an unsecured card and return that deposit,” says Fox.

After some time, if you paid your bills in full and on time, you should have a pretty solid credit score. So what is the issuer’s roadmap for giving you an insecure card?

• Not every card converts.And there is no rule when they do it. Some card issuers automatically start evaluating your unsecured account after a certain number of months.
• Others make you ask. And some require you to apply for one of their unsecured cards and close a secure account in order to get your deposit back.

If you buy a secured card, “the most important thing is to get the best secured card, which will be converted to an unsecured card and return that deposit,” Fox recommends.

Benefits of a secure card

• Secure cards work like traditional credit cards. They are easier to get with little or no credit.
• They open the way to an unprotected map. If you can establish a positive payment history, your card issuer may increase your credit limit or upgrade your card to unsecured.

Disadvantages of a secure card

• You post collateral as collateral to secure a line of credit. Lines of credit are usually equal to your deposit, which can range from a few hundred dollars up to five figures.
• Issuers retain this security deposit until you close your account and pay all of your expenses.
• You must have sufficient income to qualify despite the deposit.
• Annual fees are general.
• Many secure card issuers conduct credit checks.

Questions to Ask Potential Issuers When Considering a Secure Card

• What is required to get your deposit back when the time is right and how long will it take? Issuer rules may vary, so it is important that you know this information before registering.
• How quickly can I increase my credit limit? Varies; for example, the Capital One Platinum secured credit card gives you access to a higher line of credit after making your first five payments on time.
• How easy is it to turn your secured card into an unsecured one? This also varies among issuers. For example, starting at seven months, a Discover it® secured credit card automatically reviews the account monthly to determine if it qualifies for an unsecured line of credit. If so, you simply return the deposit and keep the same card and account.

bottom line

Remember: your first card is the guardian. While you’ll likely upgrade to a more “adult” card in the future, you’ll want to keep your first card open for a long time. Closing your oldest card can affect your credit score, which is 15 percent of your FICO score.

Dana Dratch is a personal finance and lifestyle writer who loves to talk about money and credit. She also writes red herring puzzles (from Kensington Books), which are often money-driven. Contact her at: @ReadAboutMoney.