First credit card dilemma: Student card vs. secured card

If you’re a student who’s applying for a credit card for the first time, you may find yourself choosing between a student card or a secured card. While both types of cards look the same as any other card in your wallet — and any card on your credit report — and both allow you to make purchases and build a credit history, there are a few big differences between the two.

So how can you decide between a student card and a secured card? Here are a few pointers to help you decide.

Choosing 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 is simple.

“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, it’s worth noting 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 much smaller credit limit.

In general, first-time card cardholders with no credit history typically receive an initial credit line of $500 to $1,500. And, some student cards offer credit limits as low as $100.

Low credit limits can be a challenge, as experts recommend never using more than 30 percent 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 about 17.09 percent.
• Some student cards offer cash back rewards.
• Many student credit cards charge no annual fee.

Drawbacks of student cards

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

Choosing 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 roadmap for getting you an unsecured card?

• Not every card converts, and there’s no consistency in terms of 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 you to apply for an unsecured card and close the secured account to get your deposit back.

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, but are easier to get with little or no credit.
• They open a 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.

Bottom line

If you’re trying to choose between a secured card and a student card as a new credit card user, it’s important to weigh the potential benefits and drawbacks of both options. By considering these factors, you’ll be better prepared to make a decision that’s right for your wallet. But whichever route you take, remember that you should make responsible decisions with your card to help optimize your credit score and open the door for better cards in the future.