Today almost everything relies on credit. It determines the rate of interest you’ll pay on a loan, the ability to lease a car, and the zenith: whether you will be approved for a mortgage to buy a home. However, if you are between the ages of 18 and 21 getting approved for a credit card is far from guaranteed. Therefore, you may need to consider a secured credit card.

Story Highlights:

  1. Secured credit cards can help students build credit without a cosigner if they have an income.
  2. Use a secured card only until you can get a regular card.
  3. Learn about annual fees and line of credit.

The CARD Act of 2009 prohibits consumers under 21 from opening an account unless they can prove they have the “independent means” of repaying the bill or provide the signature of a cosigner who can. This can hinder students entering college from establishing credit during crucial credit building years.

If you have a solid income or if your parent can act as your cosigner when you apply for a credit card, then certainly look for a regular, unsecured credit card. It is guaranteed to have a lower fees and better rewards (secured cards don’t offer rewards at all). If you get denied for whatever reason, here is what you should know when considering a secured credit card.

Secured Credit Cards: An Explanation

A secured credit card works just like a regular credit card – you can book a flight, shop online and cover dinner. Since you don’t have any credit, you will need to deposit a certain amount of money held as collateral in case you default on your secured card. The amount of your deposit and the stated income on your application will determine how much credit you will be eligible for.

Secured cards require an initial cash collateral deposit, usually of $300 to $500, which will then essentially act as the credit line for the account.

However, the money does not come out of the deposit like a prepaid card; you will pay the bill like a normal credit card. There is no “refilling” and thus you are able to build credit, which means you should only get a card that will report to the three major credit bureaus.

Expenses to Expect

In terms of fees, when searching for a card make sure the issuer doesn’t charge an application fee. Every secured card charges an annual fee (even if they call it a monthly fee), and they hover around the range of $18 to $39.

The APR varies as well; look for a rate between 18.24% to 20.24%. Rates and fees that vary too drastically from those amounts, especially if they are much lower will have hidden fees and other traps, so make sure to read the fine print.

After receiving and using the card, try to buy just a few things each month and always pay down your balance in full. Even if you have 0% APR you want to show creditors that you are reliable. It will take around a year of dutifully paying your bills for your bank to offer you an unsecured credit card.

When you close the secured account your bank will return the collateral.

Keep in mind that a secured credit card is just a tool to get you to the next level – a regular unsecured credit card. With this initial step, not only are you building your credit (which will ultimately lead you to being considered for a mortgage), you are also developing good financial habits, which will stick with you for life.

Key Takeaways:

  1. A secured credit card is just the first step to building a credit history.
  2. Make sure your payments are punctual and reported to the three major credit bureaus.
  3. Only buy a few things each month and never carry a balance.
  4. Be careful for extraordinarily low fees and APR because there is probably a catch.
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