70% of consumers have at least one credit card.
Credit cards are excellent financial tools that can help you build great credit history and make flexible purchases. Some credit cards help individuals build credit faster than others, while some offer rewards for certain purchases.
If you are looking for a new credit card, you may feel overwhelmed by all of your options.
However, gaining a solid understanding of the difference between secured and unsecured credit cards can make this process much easier.
When it comes to a secured vs. unsecured credit card, we have answers for you. Read on for insight!
What is a Secured Credit Card?
A secured credit card is a credit card for bad credit that requires a cash deposit upon request. This cash deposit becomes the credit card’s line of credit.
So, for example, if you provide a $500 cash deposit when requesting a secured credit card, you will automatically have a $500 credit line on that card.
You can view this deposit as a form of loan collateral, which acts like your personal proof of borrowing viability in the eyes of the bank.
It is possible to increase your line of credit by providing additional collateral. However, it is possible to boost your credit line simply by maintaining good standing with payment history and card use.
The minimum amount you have to deposit when requesting a secured credit card will vary from company to company. Not all banks offer secured credit cards, either.
Most secured credit cards will have an annual fee. Others may incorporate other fees for use and even for applying. For this reason, it’s important to closely analyze the fine print of any contract or agreement you sign.
Additionally, many secured cards do have higher interest rates and fees than unsecured cards.
Secured credit cards, in general, are designed to help people build credit history quickly. If you pay your bills on time and don’t carry a balance, you may even be able to build your credit history enough to qualify for an unsecured credit card.
Once you close your secured credit card account in good standing, you will receive your security deposit back. However, if you fail to pay a balance, your credit company may seize your deposit.
What is an Unsecured Credit Card?
An unsecured credit card is the most common type of card in use. It does not require a deposit to establish a credit line.
However, to be approved for an unsecured credit card, an individual must present viable credit history, earning potential, and financial health. For this reason, it may be more difficult for individuals with bad credit to obtain an unsecured credit card for bad credit.
With unsecured credit cards, your credit limit will depend on your current income and credit history. These cards are still subject to potential annual fees and interest rates, just like other cards.
Most banks offer unsecured credit cards to consumers, and there are many options available on the market. It’s possible to choose an unsecured credit card that offers rewards for certain purchases, for example, or ones that give users additional perks.
If an unsecured credit card user fails to pay a balance, banks will have to rely on debt collectors to receive that balance.
Secured Vs. Unsecured Credit Cards
Now that you have a basic understanding of secured and unsecured credit cards, let’s dive into their comparison.
1. Both Build Credit
Both secured and unsecured credit cards give consumers viable means of building credit. The way you use either card will influence your credit history.
However, secured credit cards are specifically designed to help people with no or poor credit history build good credit. For this reason, the best way to view secured credit cards is as a tool for improving financial health.
2. Secured Cards Are Higher cost
Because they cater to people who aren’t able to obtain unsecured credit cards, secured cards cost more to you, the consumer. They charge higher interest rates and fees for carried balances and late payments, for example, than unsecured cards.
If you fail to pay your balance in any way, you may also lose your security deposit. This can also be incredibly damaging to your credit history.
Some banks are also apt to charge users a lot of additional fees for using a secured card. For this reason, some people may find their line of credit consumed by fees before they’ve even used it.
3. Unsecured Cards Offer More Rewards
Unsecured cards, in general, give users a lot more perks beyond credit-building. Most unsecured cards offer cash back on purchases, giving consumers incentives to buy from specific shops and locations.
Others may give travel rewards in the form of points or access to other commercial services.
It’s also common for unsecured cards to offer sign-up bonuses to first-time users. These may be statement credit or introductory low-interest rates for carried balances.
Secured cards often do not offer such rewards, given that their primary purpose is to address bad credit history.
4. There Are Fewer Secured Cards Available
Given the fact that they address high-risk borrowers, few banks offer secured credit cards to users. For this reason, consumers may feel more limited when looking for an ideal secured card for their needs. One of our favorite secured cards that is available to most consumers is the OpenskyCC. There is no credit check associated with the card request, and it’s quick to open an account.
Unsecured cards, on the other hand, are much more common. Most national banks offer a variety of credit cards to consumers.
5. Secured Cards Preclude Unsecured Cards
In general, many secured credit card users rely on these accounts as a means of building the history they need to apply for unsecured cards. For this reason, they are ideal for young adults or students needing to secure more credit.
They are also ideal for people needing a long-term credit fix.
In general, if you maintain good standing with your secured credit account, you’ll be able to apply for an unsecured card in as little as a year.
Final Thoughts: The Secured Vs. Unsecured Credit Card
When it comes to a secured vs. unsecured credit card, the key difference lies in these cards’ purposes. Secured cards, in general, help individuals build a solid credit history. Secured cards also require a deposit to establish a line of credit and often carry more fees and higher interest rates.
Unsecured cards, on the other hand, build credit but are designed for people with higher creditworthiness. They do not require a deposit and tend to give users more perks like points and cash back.
If you’re wondering which card is best for you, or how you can qualify for a bad credit loan, we can help. Start a conversation with us now!