The following is a guest post by CreditShout, a personal finance blog dedicated to educating people on how to manage their finances and save money with credit cards. You can follow Kevin on twitter: @kevinfleming . If you’d like to guest post, you can submit your information via this form: Guest Post
Turning eighteen, and often going away to college, are major steps on the pathway to the real world. Another, often overlooked major step on this path is beginning to build your credit. When you apply for a mortgage, a car loan, or even student loans, your credit score can have a big impact on whether you are extended a loan and how much that loan costs (i.e. what the interest rate is).
As soon as you turn eighteen and are legally an adult, you can begin the process of building a good credit score that will stay with you for life. However, many young people are uncertain as to the best way to go about establishing a strong credit history. Young people may also be unaware of how to choose between the two principle options available to them: secured credit cards and student credit cards.
Secured Credit Cards
Secured credit cards are a form of secured debt. This means that there is collateral guaranteeing you will pay back the debt. The collateral in this case comes in the form of cash, which you give to the lender to hold in an account.
Your credit line is usually extended up to the amount of security you provided. This means if you have a secured card with a $500 limit, you will have to put $500 into an account (which usually earns interest similar to that you would earn at a local savings bank). If you fail to pay your bills, the lender can seize the $500.00 to satisfy the outstanding debt.
Almost every secured credit card charges an application fee, and many charge an annual fee (although not all do). Shop around online, and at your local bank and credit union to compare fees and find one with the lowest charges. Most secured cards also have high interest rates on borrowed money, so shop around and compare this feature as well.
If you opt for a secured card, make sure that the lender reports to the three major credit bureaus: Equifax, Experian and TransUnion. These three bureaus are responsible for keeping the data on your credit history, and when lenders check your credit, they ask one (or more) of these companies for your credit report. If your secured card doesn’t report to the credit bureaus, the card will do nothing to help you begin building your credit since lenders will never know about it.
Many secured cards also convert to standard credit cards after a set period of time, as long as you are responsible with your bills. The standard length of time before a card converts is between 12 and 18 months. Make sure to find a card that offers this feature, if you opt to go this route.
Student Credit Cards
Unlike secured cards, student credit cards are unsecured debt. That means that there is no tangible asset guaranteeing the loan. You are extended a line of credit (based on your credit score, income and other related factors) and can use that line of credit however you see fit. If you have a $500 limit and charge $500 worth of pizza, the creditor would have no asset to seize if you didn’t pay your bills.
Student credit cards are very similar to standard credit cards issued to any adult. They are issued by many of the same banks or credit unions, and some offer similar features to standard cards, such as rewards point programs. Some, but not all, charge an application fee. The interest rate is usually higher than a standard card issued to an adult, however, but lower than the interest rate on a secured card. The credit line is also relatively low on most student credit cards, since most students do not have high incomes.
If you’re looking for a decent student credit card, I recommend looking into the Discover Student Card. This card is very similar to the Discover More Card, but has a higher interest rate because of the fact that it’s a student card.
Secured Cards Vs. Student Cards
There are both benefits and detriments to secured cards and student cards. For example, secured cards have a higher interest rate than most student credit cards. They also require you to tie up the money that you put into the account, where it earns a relatively low interest rate as compared with other investments. You cannot earn rewards points on secured cards as you can on some student cards, and most charge annual fees while many student cards do not.
A student card may also be a better option because it is more similar to a standard adult credit card. Secured cards are not usually meant to be kept for long periods of time, due to the fees associated with the card and other such factors. Student cards, on the other hand, could theoretically be kept open indefinitely as long as there is no annual fee. Since a part of your credit score is determined by the average age of your credit accounts, opening a student card and keeping it open throughout your life can make your credit-history longer and have a favorable impact on your score.
However, the major benefit to secured cards is that it is almost impossible to get in over your head in debt. Because your credit limit is restricted to money you have in the bank, you can’t run up huge credit card bills that could follow you beyond the college years. With a student card, it is entirely possible to get yourself into financial trouble by charging up to your credit limit when you don’t have the cash to pay. It may also be easier to qualify for a secured card than for a student card, since there is less risk to the lender.
Building Your Credit
Regardless of whether you choose a secured card or a student card, the key is to use these financial tools wisely to build your credit. Don’t ever carry a balance on either card, as you’ll end up paying interest at a high rate. Carrying a balance is not necessary to build credit, contrary to a popular myth.
Charge a small amount on the card each month and pay the balance in full. Over time, you’ll develop a record of on-time payments, which accounts for 35 percent of your FICO score. Keep your balance low, and refrain from applying for too many cards as a maxed out card and multiple inquiries (i.e. multiple new accounts) can hurt your credit.
By practicing these tips and using credit wisely, you’ll be on your way to creating a strong credit score which can make borrowing for the big stuff a breeze.