Credit cards can be a convenient way to make purchases, pay bills, and build credit. However, not all credit cards are created equal. Secured and unsecured credit cards are two types of credit cards that differ in how they are backed by collateral, their credit limits, and their approval criteria.
In this article, you will learn the differences between secured and unsecured credit cards and we will also help you decide which one may be right for you.
What are Secured Credit Cards?
Secured credit cards require a deposit to be made by the cardholder to secure the credit limit. The deposit is typically equal to the credit limit, and the cardholder cannot access the deposit until they close the account or upgrade to an unsecured credit card. The deposit acts as collateral for the credit card, which means that if the cardholder fails to make payments, the credit card company can use the deposit to pay off the debt.
This is the best credit card type for people who are new to credit or have a low credit score. They can help build credit by demonstrating responsible use of credit over time. Some secured credit cards also offer credit increases or the option to upgrade to an unsecured credit card after a certain period of responsible use.
Pros of Secured Credit Cards:
Easier Approval: Secured credit cards are easier to obtain than unsecured credit cards because the deposit reduces the risk for the credit card company. This can be helpful for people who have a limited credit history or poor credit scores.
Credit Building: Secured credit cards can be a handy tool for building credit. As the cardholder uses the card responsibly and makes payments on time, the credit card company reports this activity to the credit bureaus, which can help improve their credit score over time.
Credit Limit Control: Because the credit limit on a secured credit card is determined by the deposit, the cardholder has greater control over their spending and can avoid overspending.
Cons of Secured Credit Cards:
Deposit Requirement: Secured credit cards require a deposit to be made by the cardholder to secure the credit limit. This can be a financial burden for some people who may not have the extra funds to deposit.
Limited Credit Limit: The credit limit on a secured credit card is typically lower than that of an unsecured credit card. This can be a disadvantage for people who need a higher credit limit for larger purchases or emergencies.
Higher Fees and Interest Rates: Secured credit cards may have higher fees and interest rates than unsecured credit cards. This can make them more expensive to use over time.
What are Unsecured Credit Cards?
Unsecured credit cards do not require a deposit to be made by the cardholder. They are backed solely by the cardholder’s creditworthiness and income. The credit limit on an unsecured credit card is determined by the credit card company and is based on the cardholder’s credit score, income, and other factors.
Unsecured credit cards are often used by people who have established credit histories and higher credit scores. They can provide greater purchasing power and flexibility than secured credit cards.
Pros of Unsecured Credit Cards:
No Deposit Required: Unsecured credit cards do not require a deposit to be made by the cardholder. This can be beneficial for people who do not have the extra funds to deposit.
Higher Credit Limit: The credit limit on an unsecured credit card is typically higher than that of a secured credit card. This can be helpful for people who need a higher credit limit for larger purchases or emergencies.
Rewards and Perks: Unsecured credit cards often offer rewards programs and perks, such as cashback, points, or miles, which can be redeemed for travel or other rewards.
Cons of Unsecured Credit Cards:
Harder Approval: Unsecured credit cards can be harder to obtain than secured credit cards because they require a higher credit score and income. This can be a disadvantage for people who are new to credit or have poor credit scores.
Risk of Overspending: Unsecured credit cards do not have a deposit requirement, which means that the cardholder can spend beyond their means and accumulate debt. This can be dangerous for people who struggle with overspending or have a limited income.
Higher Fees and Interest Rates: Unsecured credit cards may have higher fees and interest rates than secured credit cards. This can make them more expensive to use over time.
Which Credit Card is Right for You?
Deciding which type of credit card is right for you depends on your individual financial situation and goals. If you are new to credit or have a poor credit score, a secured credit card may be a good option to help build your credit history. However, if you have established credit and a higher income, an unsecured credit card may provide greater purchasing power and rewards.
It is important to research credit cards and compare their fees, interest rates, rewards programs, and other features before applying. Make sure to read the terms and conditions carefully and understand the credit card’s fees, payment due dates, and other important details.
It is also important to use credit cards responsibly, regardless of whether they are secured or unsecured. Make sure to make payments on time, keep your credit utilization low, and avoid overspending. This can help improve your credit score and financial well-being over time.
Conclusion
Secured and unsecured credit cards are two types of credit cards that differ in how they are backed by collateral, their credit limits, and their approval criteria. Secured credit cards require a deposit to be made by the cardholder to secure the credit limit, while unsecured credit cards do not require a deposit and are backed solely by the cardholder’s creditworthiness and income. Deciding which type of credit card is right for you depends on your individual financial situation and goals. It is important to use credit cards responsibly, regardless of whether they are secured or unsecured, to improve your credit score and financial well-being over time.
