The credit card is one of the most valuable financial tools today. With a credit card, you can make convenient purchases, get cash from an ATM and pay for goods or services over time. The catch is that you must first apply for and receive this ‘credit’ with a specific credit card issuer.
Despite the wide variety of options available, there are two main types of credit cards: secured and unsecured.
Read on to learn more about the differences between secured and unsecured credit cards so you can choose the right one for your unique situation.
What is a Secured Credit Card?
A secured credit card is a type of credit card that allows you to build your credit history by making regular payments on a designated amount. You will need to provide a cash deposit set as collateral and held by the card company.
If you default on your payments, the card company will use your security deposit as reimbursement. You can only qualify for a secured credit card if you don’t have an established credit history. It takes time to build a positive credit history, but it’s fairly easy to do and especially easy if you have an unsecured credit card.
What is an Unsecured Credit Card?
An unsecured credit card is a credit card with no deposit down, collateral, or security as proof of your ability to repay the debt. Usually, you only need to prove that you have a reliable income and a good credit history. The experts at SoFi also say “Because of their established credit history and decent credit scores, many borrowers can open credit cards with no money down (or any other kind of collateral). This is called an unsecured credit card.”
With unsecured cards, you are responsible for paying off the entire balance every month, even if you only make minimum payments. If you pay your bill on time every month, you have a good chance of building a positive credit history. If you do miss a payment, you may experience negative consequences.
Differences between Secured and Unsecured Credit Cards
One of the biggest differences between secured and unsecured credit cards is that a secured credit card requires you to make a deposit. The amount of your deposit and your credit limit is determined by the amount you deposit.
Also, you can build a good credit history with an unsecured credit card but not a secured credit card. No matter how diligently you repay your debt, you will not build a positive credit history if you have a secured credit card.
- Credit history: When you apply for a credit card, the lender will look at your credit history to determine your creditworthiness and whether to approve your application. Those with no credit history can apply for secured credit cards as a first step toward building a positive credit history.
- Credit limit: A key difference between secured and unsecured credit cards is the amount that you can charge at one time. With an unsecured credit card, lenders will provide you with a credit line after you have been approved for the card. The amount you can charge using this credit line is based on several factors, including your income and other debts. With a secured credit card, lenders will set your credit line based on the amount you deposit as collateral.
- Interest rate: While the interest rate will depend on your specific card and the company that issued it, the main is the interest rate that you will be charged. The interest rate you will pay will be based on the amount of money you borrow.
If you have no credit history or your credit history is less than desirable, you can apply for a secured or unsecured credit card to help you establish a positive credit history. Remember, though, that credit cards are costly if you don’t use them responsibly.