Now that consumer protection laws have stepped in to curb credit card abuse by young adults, applicants under the age of 21 have to jump through additional hurdles to obtain a credit card.
Under the Credit Card Act of 2009, credit card companies cannot hold young adults responsible for their credit card bill unless they earn sufficient income or have a co-signer. And that's a hard hurdle to clear for most college students who may only have part-time employment.
While these laws offer protection to young adults from credit card abuse and unfair practices, it also makes them dependent on their parents by requiring a co-signer if they do not have sufficient income.
In order to teach good spending habits and prevent surprises in the form of over the limit fees, parents will benefit from using secured credit cards with their young adult students.
People often associate secured credit cards with bad credit, but that is not always the case. Secured credit cards serve as a useful tool for parents to monitor their children’s spending habits and tame the situation before it gets out of hand. Young adults should avoid making major credit card mistakes early in order to preserve their credit history.
What Is A Secured Credit Card?
Secured credit cards offer a credit limit equal to the amount you paid into the account as a deposit unless you specify a different credit limit. The credit is established in the student’s name.
A secured credit card may have higher rates and hidden fees.
If the student doesn't pay bills on time, they will be building a poor credit history, which is worse than no history. Still, parents can set a credit limit and monitor the account to make sure bills are paid on time and the balance stays under the limit.
Questions To Ask When Searching For The Best Secured Credit Card
Before applying for a secured credit card, do your homework and consider all factors that would result in unexpected fees and costs.
- What happens if the student exceeds the set secured credit limit? Will there be an over the limit fee, or any other fee or will the card be frozen until the balance is brough below the credit limit?
- Is there a fee for getting an extra card, or adding a user? Keep it simple by having one student per card, and beware of fees for extra cards or extra users.
- Can you raise or lower the spending limit at any time?
- Will the card work in an ATM? If so, what are the ATM fees?
While there are many pros and cons to teens and young adults using credit cards, we have specifically laid out the pros and cons of secured credit cards below:
Pros and Cons Of A Secured Credit Card
Pros
Convenience: A secured credit card is easy to reload and monitor without having to go through all the hassles of writing checks and doing bank transfers.
Low Threshold for Application: It is usually easier to get an unsecured card, which is especially important if the parents have credit problems. In most cases, parents can add themselves as an authorized user. A secured credit card also goes a long way in rebuilding credit. Even without a cosigner, it's fairly easy to get a secured credit card.
Same Protection As a Credit Card: Also, the student will have the same level of protection as a regular credit card if their secured credit card is lost or stolen.
Set Limits on Spending: Even if you make a larger deposit for the credit limit, some cards will also allow you to set a lower balance limit for that user. In most cases, parents can set up monthly automatic allowances and create budgets.
Easy to Track: You can view all charges and bill payments on a credit card statement without having to balance a checkbook.
Build Good Credit History: If you pay on time and pay off your balance each month, you will demonstrate financial responsibility and build your credit history. Just make sure that the secured credit card you select will report your activity to the major credit bureaus. Otherwise, your credit score will not be improved.
Cons
Responsibility: If your student runs up the card and doesn't pay off the balance, it could hurt your credit score as well as your child’s credit score.
Fees: Secured cards tend to be expensive, and interest rates are high. However, if you pay off the balance in full each month, there should not be an issue. Beware of transfer fees when transferring funds from your bank to the card. Some cards have monthly automatic allowances, so take advantage of auto withdrawal if it is required for a free option.
Overdrafts: Be careful about overdrafts and all fees associated with the secured credit card. Consumer protection laws require you to opt in to every overdraft purchase so that you don’t overspend by a few dollars and face excessively high fees. At the same time, other fees are associated with secured credit cards.
Frequent Replenishment: Credit limits tend to be low, so expect to regularly reload the card. If the student faces any emergencies and needs cash fast, this card may not be able to cover the expenses. Then again, if the student is having an emergency, most parents would prefer to be the first to know.
Risk of negative Impact on Co-signer’s credit Scores: The student can build their credit score with a secured credit card, at a small risk to the parent, especially if they already have a low credit score. With that being said, a credit card with a low limit helps the student build their credit at relatively low risk to the parent.
When Should Parents Consider Getting A Secured Credit Card For Their Young Adult Students?
- Basic Expenses: The main purpose is to provide funds for gas and basic needs without the risk of overspending. The card will set a limit on spending to ensure your children do not go on a shopping spree by using a secured credit card with a set limit.
- Lower Risk of Loss: Secured credit cards by default tend to have lower credit limits. If someone gets ahold of the card and immediately uses it, the risk will be limited to the available credit limit on the card. You can contact customer service and freeze all accounts.
- If you have a bad history with banks and can't open free ow low cost checking accounts: Unfortunately, once you overdraw your bank accounts and faily to pay bank fees, your account will get flagged, making it difficult to open a new bank account
How To Get the Most Out Of Your Secured Credit Card
Now that we have weighed the pros and cons of a secured credit card, how do you use the card to make the most out of building credit for a new account?
- Avoid carrying a balance. This is particularly important with secured credit cards, since the APR will probably be high, so be sure to pay more than the minimum amount to save on interest and demonstrate financial responsibility.
- Use the card as a barometer. Based on the student's spending history, parents can set a budget and allowance. This is also a good time to discuss financial responsibility and good spending habits.
- Set a credit limit with flexible limits. Decide on a credit limit from the onset, and adjust as neccessary. How much does the student really spend each month? Based on history, how much does the parent need to allow for emergencies or unexpected events?
- Don't miss any payments. If you miss payments, you can accrue penalties and late fees, but it will also impact your credit score.
- Use the card every month. To establish credit history, you must use your credit card consistently. Pay recurring bills with the credit card, and then pay off the balance each month.
Things To Look For In A Secured Credit Card
- No (or low) annual fee. Annual fees are just an extra expense you'd have to pay to maintain your card, but there are plenty of cards with no annual fees or application fees.
- Avoid unneccessary fees. Watch out for monthly account maintenance fees and politely decline any credit protection options
- Conversation to an unsecured credit card. Some secured credit cards offer conversation to a regular credit card after a year or two of good spending behavior. Good habits can help your student move toward a near perfect credit score.
- Grace period. The grace period is the time you have between the end of each billing cycle and your payment due date. During that period, you can pay off your balance with no interest. Grace periods are legally required to be at least 3 weeks long, so check on the grace period for your card
Where To Find The Best Secured Credit Card
Now that you know what to look for in a secured card for college students, here's our list of the best secured credit cards.
Capital One® Secured MasterCard®
- No annual fee
- Reports your payment history to all three credit bureaus (which should help you build credit)
- You will get an initial $200 credit line after making a security deposit of $49, $99, or $200, determined based on your creditworthiness.
- Choose your credit line as low as $200 up to $3000, secured by a fully-refundable security deposit.
- Monthly payment reporting to all 3 major credit bureaus.
- Security deposit needs to be submitted before the credit card can be issued.
- No Annual Fee, cash back on every purchase, and helps you build your credit with responsible use.
- A security deposit of $200 or more will establish your credit line (up to the amount we can approve). Automatic monthly reviews starting at 8 months to see if we can transition you to an account with no security deposit.
- Reports to the three major credit bureaus. Plus, get your FICO® Credit Score for free on monthly statements, on mobile and online.
Whether you’re just starting out or rebuilding your credit, we recommend getting a secured credit card as a first step to building good credit for young adult students.
Have you ever used a secured credit card? Tell us about it in the comments below.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.