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Credit Cards - Secured & Unsecured |
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Secured vs Unsecured Credit Cards: The Difference and the Benefits of Both Most people can't tell the difference between an unsecured credit card and one that is secured. Both kinds of cards sport the typical Visa or Mastercard logo, and they're pretty much identical when making purchases; either of them can be a great tool for building your credit if used properly. The key differences between secured and unsecured credit cards are in their purchasing power and credit limits. One may be more favorable than the other, depending on the specific needs of the cardholder. Secured credit cards are good for people who don't have a credit history or those that are trying to rebuild it. Your credit score isn't a big deal with this kind of card, but you usually have to pay a processing and activation fee to actually get the card, and then an annual fee to keep it current year after year. Before you can use a secured card, you have to put funds on deposit in a savings account with the issuing bank. That deposit will become your credit limit, and in the event of default, it will be used to pay down your balance. So, even though you have secured the card, you still have to make payments to the bank to cover whatever you spend. Essentially, you're just paying the back to use your own money, and this is one reason why people prefer unsecured credit cards if they're able to get one. An unsecured credit card works a bit differently. To qualify for this kind of card, you have to have some previously established credit history; and most of the time, it has to be at least fair. The fees on this kind of card are minimal, and sometimes only include an annual fee which if often waived for the first year. Even if you do have initial card fees, they are deducted from your credit limit upon activation of the card. That's much better than having to pay out of pocket, and there are no delays in your credit card being sent to you. Also, you don't have to put up a security deposit with an unsecured credit card since your credit limit is determined by your credit history. You have no security whatsoever backing your credit limit, so if you default on your payments, the issuing bank will just close your card and send your account to collections. One of the biggest benefits of a secured credit card is that it allows you to spend with the power of a regular credit card, but because you are required to provide security for your credit limit, your spending is more controlled. It's usually really hard to accumulate excess debts with a secured card since you can only spend what you can afford to secure in the first place. A secured card will also help you to learn money management skills, and it should help to curb any bad spending habits you might have. It allows you to build credit with a limited risk of damaging it in the process. And even though the card is secured, the bank will still report your credit card like a normal trade line; so, you get the reporting benefits of an unsecured credit card without actually carrying one. Once you do get to the point where you're ready to apply for an unsecured credit card, lenders will be more likely to extend credit to you since you've already built up that pattern of responsible credit management. An unsecured credit card has it's benefits, too. Most people would consider the fact that you don't have to supply collateral to get this type of card a benefit; and they are right in a sense because an unsecured credit card doesn't put that dent in your cash flow. You can spend up to the entire amount of your credit limit, and just pay the bill off little by little. An unsecured credit card lets you spend freely, even if you don't have the cash to back up your purchases. This is one reason why this kind of card is so popular, but it's also subject to more abuse by people who have poor budgeting skills. With an unsecured credit card, there is nothing securing your purchases, so if you use up your available credit, and then spend all of your cash, you've put yourself in a rut. Your credit card balance goes unpaid, and you damage your credit. This pattern of spending sometimes forces people into getting a secured credit card because after establishing a pattern of credit mismanagement, creditors aren't going to trust lending you their money anymore. In any case, both types of credit cards give you the ability to purchase goods and services on credit. You also have a layer of security with credit cards. If your card gets stolen, the credit card company won't hold you liable for unauthorized charges; if you were to have cash stolen, it would be a lost cause. Additionally, your credit card company may offer additional purchase protection, such as when you may a large purchase. So, obviously, it's more beneficial to carry a credit card because of the security that it provides. They are also beneficial in the event of an emergency, such as a car breakdown or during a time when you're displaced from your home and need to stay in a hotel for a few nights. Secured cards don't offer much in the way of extra bonuses, but unsecured credit cards do; you can often receive cashback on your purchases, and even get points on purchases you make which can later be used for airline travel, hotel discounts, car rental discounts, and the list goes on. As you can see, secured credit cards have their benefits as do those that are unsecured. However, the former is usually the only option for those that have a limited or poor credit history. Unsecured cards give you more spending power, but also require strong management skills to avoid getting into debt. Each of them will build your credit in the same way, but you need to understand the responsibilities of the type of card you choose to get the most out of it.
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