Student Secured Credit Cards: Benefits and Risks

Credit cards have become an integral part of our financial lives, influencing everything from loan eligibility to interest rates. For students, secured credit cards can be a valuable tool for building credit and managing finances, but it's crucial to understand both the advantages and disadvantages before applying. This article explores the benefits and risks of student secured credit cards, providing insights to help students make informed decisions.

What is a Secured Credit Card?

A secured credit card is a type of credit card that requires a security deposit, which typically becomes your credit limit. Secured credit cards can be used just like traditional-unsecured-credit cards, but are easier to get if you have poor credit or a limited credit history. You can make purchases with a secured credit card just as you would with a regular, unsecured credit card. The difference: The card is secured by a deposit you make when you open the account. If you default on your payments, the card issuer can use your security deposit to pay the card balance.

Security Deposit

To open a secured credit card, you make a refundable deposit that serves as collateral. The required security deposit typically starts at $200, but you may have the option to make a larger or smaller deposit. If you default on your credit card balance, the card issuer can use the deposit to pay themselves back.

Credit Limit

The credit limit is the maximum amount you can spend on your credit card and is usually equal to the amount of your security deposit.

Billing Cycle

You're billed for your credit card purchases on a monthly cycle. You can't use your security deposit to pay your secured credit card bill.

Secured vs. Unsecured Credit Cards

Secured and unsecured credit cards are both revolving credit and essentially work the same way. Depending on the card issuer, you may be automatically upgraded to a secured credit card or may have the option to request an upgrade.

Benefits of Secured Credit Cards for Students

Secured credit cards offer several advantages for students looking to build or rebuild credit.

Building Credit History

One of the primary benefits of a secured credit card is the opportunity to build a credit history. Secured credit cards typically report your account activity to at least one of the three major credit bureaus. However, some card issuers choose to report to only one or two of the credit bureaus. A card that reports to all three will have the biggest impact on your credit score; check the card issuer's policy before you apply.

Building a credit history in college means you won’t be starting from scratch when you graduate. And establishing a solid history of on-time payments can help you start out strong. Especially because the main purpose of a secured credit card is to help you build (or rebuild) your credit.

Easier Approval

Secured credit cards are typically easier to obtain due to their required cash deposit. If you're a recent immigrant, a young adult or simply have never used credit, you may not have a credit history. This could make it challenging to get an unsecured credit card. A credit report with fewer than five active credit accounts is known as a thin credit file and can limit your options. Maxed-out credit cards, collection accounts and other negative marks on your credit report can make lenders wary. Secured credit cards pose less risk for card issuers, so they're typically more accessible even with bad credit. Your applications for unsecured credit cards have been rejected.

Read also: Guide to UC Davis Student Housing

Controlled Spending

Because your credit limit is equal to your cash deposit, it’s easy to spend wisely and avoid accumulating debt.

Advancing to Unsecured Status

Many secured credit cards offer the opportunity to transition to an unsecured card after you prove your responsibility.

Instilling Financial Discipline

Utilizing a secured credit card helps you create strong credit habits, such as making on-time payments and maintaining low balances. Having a credit card can help you build healthy financial habits by doing things like budgeting, tracking your expenses and making on-time monthly payments. Whether you’re handling an emergency expense or managing day-to-day spending, having a plan to pay off your credit card is valuable.

Preparing for Emergencies

As a young adult, you might not have an emergency fund yet. In that case, a credit card could serve as a safety net to help you deal with an unexpected cost. The Consumer Financial Protection Bureau (CFPB) notes that you should be clear with yourself about what represents an emergency.

Fraud Protection

If your cash is stolen, there might not be much you can do about it. But if you report fraudulent charges on your credit card and they’re investigated and verified, many card issuers-including Capital One-won’t hold you responsible for the charges. And if you’re a Capital One customer, your credit card has a number of security features that may help you detect fraud.

Read also: Investigating the Death at Purdue

Risks and Considerations for Students

While secured credit cards offer numerous benefits, it's crucial for students to be aware of the potential risks and drawbacks.

Deposit Requirement

As mentioned, secured cards usually demand a cash deposit upfront. Making a security deposit to get a secured credit card could put a strain on your finances, especially if you want a higher credit limit.

Low Credit Limits

Secured cards typically have low credit limits, which can reduce your financial flexibility. Secured credit cards require a cash deposit to get started, but the deposit is refundable when the account is closed in good standing or upgraded to an unsecured account. Potential for a very low starting credit limit.

Fewer Rewards

A downside of secured credit cards is that they don’t have many bonuses or rewards. Unlike traditional credit cards that may offer points, cashback, or travel miles, secured cards have more limited offerings. Rewards and perks are limited.

Fees

Some (but not all) secured credit cards have fees such as annual fees, setup fees, or monthly maintenance charges. An annual credit card fee might strain your budget unnecessarily, especially if you’re not utilizing all the card’s features.

Possible Negative Impact on Credit

Like any credit card, misusing a secured card can affect your credit score. Think of it like maintaining your equipment: without proper upkeep and attention, it can fail and cause issues. Making timely payments can benefit your credit score, but late payments will hurt it. You may want to set up autopay for your credit card bill payments so you won't miss a due date.

Overspending

Having a credit card could tempt you to overspend. And overspending can be costly if interest accrues or fees apply to your transactions. If your card has a high credit limit, overspending could also lead to long-term debt that’s difficult to pay off in the future. Having a solid understanding of your credit card’s terms and conditions and how it works can help you limit or avoid interest charges, fees and long-term debt.

Hurting Your Credit Scores

Making late payments may result in late fees and negatively affect payment history records in your credit reports. And that negative information could hurt your credit scores. Late or missed payments could result in derogatory marks on your credit reports that can last for up to seven years.

Credit Utilization

Your credit utilization ratio measures the percentage of your available credit that you're currently using. Lower is better for credit scores; a utilization rate over about 30% can have a greater negative effect on scores. If your secured credit card has a $300 limit, for example, aim to keep your balance below $90. Pay off your balance each month. Carrying a balance could push your credit utilization higher, potentially harming your credit score.

Interest Accrual

If you don’t pay your credit card bill in full by the due date, your remaining balance accrues interest according to your card’s annual percentage rate (APR). Credit card interest typically compounds daily, which means interest charges are added to your balance daily. So, your interest accrues interest. Once interest starts accruing, credit card debt may increase quickly and become hard to manage.

Alternatives to Secured Credit Cards

If a secured credit card doesn't seem like the right fit, there are alternative options to consider for building credit.

Student Credit Cards

Student credit cards aren’t that different from other credit cards, but they can be more accessible to students with no credit history. That’s because student cards tend to be easier to get approved for than other credit cards-but that means they may have lower credit limits. Proof of student status may be required. Getting approved with bad credit may be difficult. The best student credit cards report your responsible spending and on-time monthly payments to the three major credit bureaus, helping you to build your credit score.

Authorized User

Becoming an authorized user on someone else’s credit card Becoming an authorized user means you’ll get a card linked to a trusted family member’s or friend’s account. While you’ll likely get your own card and can make purchases, the primary cardholder is ultimately responsible for all the charges made on the account. But negative actions like making late payments could affect both of your credit scores. If they add you to their card as an authorized user, you essentially get the chance to “piggyback” off their monthly payments to add depth to your own credit reports. But it works both ways - if they use the card irresponsibly, it can damage your credit.

Credit-Builder Loans

Credit-builder loans have you make monthly payments to a savings account or certificate of deposit (CD) in your name, and the loan issuer reports the payments to the credit bureaus.

Credit-Building Apps

Several credit-building apps can also give you a leg up when it comes to improving your credit, and often for free. You can also sign up for Experian Boost®ø, a free feature that adds your eligible utility, cellphone, insurance, rent and streaming service payments to your Experian credit report.

Debit-Credit Hybrid Cards

Debit-credit hybrid cards link to your bank account or are prepaid. Your bank or card balance determines your credit limit and covers your purchases, so your money isn't tied up with the card issuer.

How to Choose a Secured Credit Card

Before applying for a secured credit card, it's essential to compare different options and consider several factors.

Check Your Credit Score

Check your credit score.

Compare Secured Credit Cards

Compare secured credit cards. Experian's card comparison tool matches you with secured credit cards based on your credit profile. As you compare secured credit card options, consider credit limits, security deposits and refund policies, APRs and fees.

Confirm Account Reporting

Look for a card issuer that reports your account usage to all three major credit bureaus.

Complete an Application

Complete an application.

Open Your Account

If approved, you'll need to pay your security deposit and any fees required to open your account. You can typically pay by debit or electronic transfer from your bank account.

Tips for Responsible Use

Once you have a secured credit card, it's crucial to use it responsibly to build credit effectively.

Make Small Purchases Each Month

Using your card regularly and making payments on time demonstrates responsible credit use.

Pay Your Bill on Time

Making timely payments can benefit your credit score, but late payments will hurt it. You may want to set up autopay for your credit card bill payments so you won't miss a due date.

Keep Credit Utilization Low

Monitor Your Spending

Monitor your spending.

Pay Off Your Balance Each Month

Carrying a balance could push your credit utilization higher, potentially harming your credit score.

Keep Tabs on Your Credit Score

Some secured credit cards offer free credit monitoring.

Consider Keeping the Account Open

Even if your credit improves enough to qualify you for an unsecured credit card, consider keeping your secured card account open. If you're starting from scratch with no credit history, your secured card account must be at least six months old, report to at least one credit bureau and show activity within the past six months before a FICO® Score can be generated for you. A VantageScore® credit score can be generated as soon as your secured card is reported to a credit bureau, which generally happens within two months. Establishing credit is just the first step, though. To build a good credit history, you'll need to demonstrate responsible credit use over time.

Credit Cards for College Students

If you’re trying to decide between a student credit card versus a secured credit card, you should know these two types of credit cards are similar but not the same. Secured credit cards come with one benefit that makes them a better choice for a variety of people: They are the easiest to get approved for among all types of credit cards available today. Student credit cards are for students who want to begin building credit for the future. Because student credit cards are geared toward people who haven’t built their credit history yet, they tend to come with low limits and few benefits.

Student Credit Cards vs. Secured Credit Cards

Student Credit Cards: Proof of student status may be required. Getting approved with bad credit may be difficult. Rewards and perks are limited.
Secured Credit Cards: You don’t have to be a student to apply. Build credit with responsible use. Earn rewards for spending. Collateral requirement. Rewards and perks are limited. Potential for a very low starting credit limit.

The application process for both student and secured credit cards is relatively similar.

Secured Credit Cards and Military Personnel

Secured credit cards can be the secret weapon for military personnel, recruits, veterans, and their families, to achieve financial stability. They offer a straightforward and effective way to build credit, along with several benefits that align with financial goals in the military. Secured credit cards are like a steady compass, guiding you on the right path towards building or rebuilding your credit.

The best secured credit cards report your responsible credit activity to the three major credit bureaus (TransUnion, Equifax, and Experian). This behavior is documented and helps you build a strong credit history.

tags: #student #secured #credit #card #benefits #and