Starter Credit Card Options: Student Card or Secured Card?

They can both help you establish your credit history, but they function differently.

Sara RathnerSeptember 24, 2020
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On a similar note...
Starter Credit Card Options: Student Card or Secured Card?

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Using a starter credit card is a common way to build credit when you’re first establishing yourself financially. When it comes to starter credit cards, there are two main types:

As with all kinds of credit cards, there isn’t one that’s the “best” — just one that’s the best for you, given your circumstances. Here are some factors to consider as you decide between a student credit card and a secured credit card.

Student credit cards

The application requirements of student credit cards can create some roadblocks for anyone who's building credit for the first time. Often, you need to be an enrolled student to apply for a student credit card. They also require you to have a source of independent income or a co-signer if you’re younger than 21. Some student cards may only be open to applicants who already have some credit history.

Nerd tip: If you’re 21 or older, you can include not only independent income on your credit card application, but also other income to which you have a “reasonable expectation of access,” like a spouse or partner’s income.

Still, a student credit card can be a good fit for applicants who qualify. Building your credit history during your student years can help you later on, when you rent an apartment, take out a car loan or apply for a mortgage.

Benefits

  • No security deposit required. Unlike secured credit cards, you do not have to put down a deposit. If your application is accepted, you’re granted a credit limit, and it doesn't hinge on any kind of upfront collateral.

  • No annual fee. Many student credit cards charge no annual fee, which keeps the cost of holding the card low. That’s helpful when you’re first starting out and money may be tight.

  • Cash-back rewards. Some student cards offer rewards programs that earn cash back every time you use your card. It’s like using a coupon whenever you shop, but without all the work.

  • Student-friendly benefits. Some student cards come with perks like bonus cash back if you maintain a certain grade-point average or a free Amazon Prime Student membership for a year.

  • Options for international students. Some student cards allow you to apply even if you don’t have a Social Security number. This is especially helpful for international students who are trying to establish a U.S. credit history.

Drawbacks

  • Independent income required. If you’re younger than 21, you must have independent income to qualify for a student card. This can present a hardship for students who aren’t working while they’re in school.

  • Can be harder to qualify for. It's a bit of a paradox. To qualify for a card designed for people just getting started with credit, you may need some credit history. If you're new to building credit, there are other options, including secured credit cards.

Secured credit cards

If you’re not a student or you don’t have a source of independent income, you can still build credit by using a secured credit card. They function a bit differently from unsecured cards, including student cards, because you make a cash deposit, which typically becomes your credit limit. This deposit limits the card issuer's risk of accepting applicants with bad, thin or nonexistent credit files.

Benefits

  • Easier to get. You can qualify for a secured card even if you have little to no credit history or a bad credit history. Some secured cards even process your application without a credit check, which spares you a hard credit inquiry and the accompanying temporary ding to your credit scores at a time when every point counts.

  • Potential upgrade path. After a few months of responsible use, some secured cards will increase your credit limit or graduate you to an unsecured card.

Drawbacks

  • Security deposit required. You must make a deposit, which usually becomes your credit limit. A deposit of $200 or more is common. You get the deposit back if you close the account in good standing or if you upgrade to a traditional unsecured card. But coming up with that money upfront can be challenging.

  • Annual fees are common. No-fee secured cards exist, but they tend to charge higher interest rates. If you opt for a secured card that charges an annual fee, you’ll need to account for that cost in your budget since you’ll also be paying the initial deposit.

  • You may need a bank account. If you don’t have a traditional bank account that you can tap into to fund the deposit, you’ll be limited in which secured cards you can choose. There are a few available that can accept deposits in the form of wire transfers or money orders.

  • Most don’t offer rewards. With a few exceptions, secured cards don’t tend to offer rewards programs. But over time, with responsible card use, you’ll qualify for other cards with robust rewards.

Nerd tip: Building your credit history is the whole point of a starter credit card, so make sure the student or secured card of your choice reports your account activity to the three main credit bureaus: Equifax, TransUnion and Experian.

Alternatives for building credit

Becoming an authorized user on someone else’s credit card is another way to build credit. But it requires trust and good communication. The primary cardholder is responsible for all charges made to their account, including ones you make, so set a budget with them. Additionally, their account activity can affect your credit for better or for worse, so make sure you pair up with someone with solid credit habits.

You can also consider so-called alternative credit cards, most of which don't require a deposit — and some of which don't rely solely on the traditional FICO scoring model. Instead, they can evaluate your creditworthiness based on factors like how much money you make, where you work and what your bank account balances are.

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