To build strong credit, you have to start somewhere — and for most consumers, that journey begins in young adulthood. For those new to credit, two great starter options include student credit cards and secured credit cards. While they work differently, their common attribute is their accessibility to people just starting out.
Learn more about how student credit cards and secured credit cards work to decide which one is best for you.
[READ: Best Credit Cards for Students]
What Are Student Credit Cards?
Student credit cards are designed to help young adults learn the basics of how credit cards work. “For students, it’s particularly important to build credit in a way that is financially responsible,” says Chris Fred, head of U.S. credit cards and unsecured lending at TD Bank.
Typically, student credit cards start off with a lower credit limit than you’d find on regular unsecured cards, and there is no annual fee. Some issuers also offer special perks, benefits and rewards. For example, the Discover it® Student Cash Back card charges no fee the first time you make a late payment. Student credit cards are a good choice if:
— You are attending college and have a part-time job.
— You understand the basics of how to use credit and why it’s important to make timely payments.
— You plan to use the card for small purchases and pay the bill in full to build credit.
[Read: Best Secured Credit Cards.]
What Are Secured Credit Cards?
The other major option for people who have little or poor credit is secured cards, which require that you put up a security deposit as collateral. The amount you deposit is usually equivalent to your credit line. Because your account is backed by your deposit and there is less risk for the credit card company, the requirements for approval are lower than unsecured credit cards. Secured credit cards are a good choice if:
— You are not enrolled in college.
— You’ve had credit missteps in the past.
— You find a card with a clear path to unsecured card graduation.
How to Decide Between a Secured or Student Card
For most, student credit cards are preferable for their better rewards and features — plus you don’t have to put any money down. However, if you cannot qualify for a student card, secured cards are the next best thing for credit-building.
To help you decide what’s best, ask yourself:
— What are your prerequisites? Ideally, before you open any type of credit card, you should have had some personal finance practice such as paying a bill in your name, managing a checking account, using a prepaid debit card, and earning regular income.
— Do you have any established credit? If you are starting out with a credit file already established, that can give you access to more credit card options, says Stoy Hall, a certified financial planner and CEO and founder of Black Mammoth, a financial planning firm. “We always recommend to our clients who are parents to get their kids on their accounts as an authorized user to start building their credit,” he says. However, only parents with strong credit should do this, he adds. If you start off with a decent score, then you may be able to skip past secured cards and straight to either a student card or other unsecured card.
— Would you prefer a safety net? For first-time credit users, a secured card might be best to use as a practice run to help get you up to speed before moving into an unsecured credit card. If you’re looking for a baby step into credit, then go that route. “You have a little bit more control over how large of a line you want to have with a secured card,” says Fred.
[Read: Best Credit Cards for Fair Credit.]
A First Credit Card Checklist
Whichever type of card you choose — student card vs. secured card — here are some of the features to look for:
— No annual fee
— Some type of reward or benefit aligned to your needs
— Educational tools, like free credit score
— Clear pathway to regular card or increased credit limit
A+ Credit Habits for Any Card
Student credit cards and secured credit cards are both meant to be steppingstones. Here’s how to build a strong credit foundation and move on to other products in the future.
— Don’t be afraid of credit. While you may have heard people’s scary tales of getting into debt trouble in their youth, that shouldn’t prevent you from using credit. “Getting a credit card open is one of the most vital things to do,” says Hall. It can help establish your credit file so that when you need to obtain an auto loan, apartment or mortgage in the future, lenders will see a track record of credit usage.
— Never miss a payment. “Paying your bills on time is the most critical element,” says Fred. His advice to all those new to credit, including his own kids: Set up automatic minimum payments. “That way even if you’re not sure you can pay the whole balance, at least you can pay the minimum, and you won’t miss a payment,” says Fred. Then, you can log on manually to make additional payments.
— Watch that balance. “There is this magic number in the world of credit, and it’s 30% usage,” says Hall. Try to stay under 30% utilization and as close to zero as possible, and it will have a positive impact on your credit score.
— Avoid interest when possible. One of the best credit habits to cultivate is to take advantage of the perks without extra borrowing costs, says Hall. “Pay your bill off before the end of the month so you don’t get hit with those interest charges.”
— Do your homework. About one in five Gen Z credit users say they lack the tools or knowledge to understand and manage their credit score, according to a FICO study. But credit card apps and websites, especially for student and secured card users, often have resources such as free credit scores and other content to help you ace whatever credit tests come your way.
Whether you choose a student credit card or a secured credit card ultimately won’t matter in the long run — it’s what you do with the card that counts. You could carry your first credit card throughout your life, or simply use it as a bridge to better options down the line, says Fred. “The choices you make at the beginning may not be everlasting,” he says. “You could always get another credit card.”
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Should You Get a Student Credit Card or a Secured Credit Card? originally appeared on usnews.com
