You’re in high school or college, and you’re ready to start building your credit history by applying for your first credit card. At this stage, your options are very limited because of your age and the fact that you probably don’t have a significant full-time income yet. The two primary choices are a student credit card or a secured credit card; knowing which to select, however, depends on various factors. In this article, we’ll dive into what you should know and what you should consider when deciding which type of credit card is right for you.
Questions You Should Ask
Before getting into which type of credit card you should consider, there are a few conditions you should be mindful of and on which you should evaluate any credit card you look at:
- The card should help you build your credit. This is arguably the most important factor to weigh since at this early point in your financial lifespan you’ll want to make as much of a positive impact as possible. Some starter cards only report negative information to credit reporting agencies, so avoid those. Look for a card that will report all your good habits – such as on-time payments and low credit utilization ratio – so your credit score can flourish quickly.
- How much will it cost you to open and have a credit card account? You’ll find annual fees on most travel and rewards credit cards, but some starter cards have them, too. In addition, certain credit card issuers may charge you a fee to open an account. Prioritize credit cards that will be free for you to use so you can put more money towards making responsible payments.
- Upgrading to a better credit card. Once you’ve shown that you’re a trustworthy borrower of money, issuers may open the door for you to move on to a credit card with a higher limit or additional perks. If you’re not offered a better card, you can also ask for an upgrade to an unsecured credit card.
Student credit cards are traditional, unsecured credit cards that are simply targeted to adults enrolled in school. Among their benefits you’ll find that no security deposit is required, many of them don’t have an annual fee, and some include modest cash back or other rewards benefits. However, in order to qualify for a card for students you’ll have to, naturally, provide proof that you’re enrolled part-time or full-time in school. In addition, you’ll need to be at least 18 years old and provide proof of some type of income. You don’t have to be working full-time, but issuers want to see that you’re earning money so that you can pay back whatever balance you build on your card. If you’re under 21 or don’t have a high level of income, you may need a co-signer to help get you approved. Although student cards don’t ask for a security deposit, their initial limits are quite low. Don’t be surprised if you’re approved for a student card and given a limit of around $800. Even though it’s not a lot of wiggle room, it does help make you disciplined about spending money wisely and on what you need over what you want. Besides, if you make a good impression you may get a limit increase after a handful of months. One more thing to remember if considering a student card is that issuers may still check your credit history when you apply, even if you’ve never had a credit card before. Some issuers are lenient regarding their qualification criteria, while others are stricter. It all depends on the institution issuing the card.
Secured credit cards are not just limited to students; anyone who doesn’t have a credit history, or is trying to repair their credit, may qualify for one. Like student cards, you may need to show proof of income and your credit history may be inspected, but you have a higher likelihood of being approved for a secured card. Also, like student cards, some secured cards may include rewards programs where you can earn back as you make purchases. These perks aren’t standard, but some issuers offer them on their cards. The defining feature of secured credit cards is the security deposit that issuers will require you to provide in order to use the card. This deposit serves as collateral that the issuer can claim if you’re unable to pay back what you owe. Most secured card issuers have a minimum deposit requirement, although you’re free to deposit more than that. With secured cards, your credit limit will be equal to the deposit you provide. Therefore, if you only give the minimum – let’s say it’s $200 – you’ll only have $200 to spend. But put down $1,000 and your limit will be dramatically higher. Once you’re able to graduate to a better all-around credit card, it’s possible for issuers to reimburse your deposit once you’ve closed the secured account. If you opt for a secured card, you’ll want to be very diligent in fully paying off your statement balance each cycle. Secured cards are notorious for having high APRs, and you could end up paying dearly if you leave a high balance unchecked for an extended period. Your credit overall will also suffer, which is the opposite of what you want just as you’re starting to build your financial reputation.
Alternatives to Applying
If applying for either type of credit card seems difficult, you have a couple of tools at your disposal to increase your chances.
- Become an authorized user. If you need help establishing a credit history, look to a parent, relative, or trusted friend and become an authorized user for one of their credit cards. It’s especially useful if the main account holder has a long and good credit history because you’ll benefit from their financial stability. Being an authorized user, especially a responsible, one can give you a big boost when applying for a credit card – and it can also give you access to a wider selection of cards.
- Use a co-signer. Like becoming an authorized user, a co-signer increases your chances of being approved because this person essentially becomes responsible for your debt if you’re unable to pay back what you owe. In this scenario it also helps for the co-signer to have a robust credit history because it will make issuers more comfortable when it comes to lending you money.
Student cards and secured cards both have their advantages and disadvantages, and your choice depends on your individual financial and situation. If you don’t want to pay an annual fee but don’t mind a low credit limit, choose a student credit card. If you’d rather have more control of your spending via a deposit of your own money, opt for a secured card. In any case, your first credit card will play an important role in the types of credit that you’ll be eligible for in the future. Try not to get overzealous about your spending once you’re approved, and remember to pay your balance in full every month. Your future self will thank you for it.