Secured Credit Card vs. Unsecured Credit Card

Credit cards are not as simple as they seem. Thirty years ago the only thing you had to look out for when applying for credit cards is the interest rate you would pay and what potential fees you would have to pay. Now credit cards offer introductory rates, cashback and other reward programs, credit cards can be prepaid, secured and unsecured. If you have ever wondered what the difference between a secured credit card and an unsecured credit card is, you have come to the right place.

Secured credit cards basically require you to have collateral in case you cannot manage to make your monthly payments. Generally you will have to place a few hundred or thousand dollars, depending on how high of a credit limit you would like, into an interest bearing savings account. As long as you make all payments and nothing “fishy” happens the money in the account is yours, if for some reason you fall behind on your payments the money in the account will go to the credit card company. This allows you to build your credit and gives you all of the conveniences that comes along with a credit card. Credit card companies get the peace of mind of knowing that they are virtually guaranteed to receive their money back even if you are unable to make your payments. Because you will generally be depositing money into an account you want to make sure that you are working with companies that you can trust, there have been many instances of so called “secured credit card companies” that end up running scams and stealing your hard earned money.

Unsecured credit cards are the exact opposite of secured credit cards. When a credit card company gives you an unsecured card they are truly extending credit to you because unsecured cards do not require any collateral! You can qualify for unsecured cards based on your credit history and your earnings potential. Unsecured cards with the best terms, lowest APR and fees generally require the best credit scores and financial strength. If you are interested in getting an unsecured card but your credit score is unspectacular [Less than 700] you should either focus on credit cards for people with bad credit or try to get someone with good credit to co-sign your application for you.

The only real difference between secured and unsecured credit cards is that secured credit cards require collateral whereas unsecured cards do not. If your credit score is strong enough to where you can obtain an unsecured card that gives you terms that you are looking for [A high enough credit limit, reasonable APR and fees, nice rewards and cashback options available…] then you have no need to consider secured cards. Secured cards are a great option for people with poor credit however. They give you a chance to raise your credit score, which is very important in this economic climate.

Simply pay off your balance each month, never run monthly balances of more than 30% of your maximum credit limit and take your card seriously and you will see your credit score soar. It is nearly impossible to gain access to large lines of credit, whether it is a mortgage or auto loan without having a solid credit score. A mild 20 point increase in your score could mean a lower APR on your mortgage, auto loan, personal loan or credit card which can mean thousands of dollars saved over the years.

Unsecured cards are more convenient and they are what people generally think of when they imagine a credit card, but if you have to opt for a secured card it is not the end of the world. As long as you have around a thousand dollars you should be able to land a secured card with fair terms, which is all you can ask for. You will not exactly be buying items on credit, but you will be able to enjoy many of the luxuries credit cards provide.