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Secured vs Unsecured Credit Card
28 Mar 2019

Secured vs Unsecured Credit Card: What’s the Actual Difference?

In the US, consumer debt reached $4 trillion in 2018.

Americans owe more than 26% of their annual income on personal loans, credit cards, and car loans.

Interest rates, hidden fees, and high spending habits can lead to many Americans carrying a constant balance on credit cards. Debt is never a good thing. But there are ways you can use a credit card to rebuild credit and manage spending.

Read on to learn more about a secured vs unsecured credit card.

What Is an Unsecured Credit Card?

An unsecured credit card is like an online loan that requires no collateral. You are approved or declined based on your credit score and payment records.

The credit limit with these credit cards is based on a lender’s assessment of your credit risk. If you have a good to excellent credit rating, you can expect to get approved for thousands of dollars.

Students or those who don’t have much credit often are given a low credit limit such as $500.

What Is a Secured Credit Card?

On the other hand, a secured credit card is risk-free for the lender. Applicants submit a refundable security deposit in order to be approved for a secured credit card.

The amount of money you deposit is your credit limit. If you deposit $500, you can spend a maximum of $500. In other words, it’s your own money you are spending, but with all the benefits of a credit card.

When you pay off the full balance on the credit card, you can close the account if you wish. At that point, you’ll get your deposit back in full.

If you fail to make payments on this credit card, the bank has the right to keep your deposit and cancel your card.

Secured Vs Unsecured Credit Cards – The Similarities

There are several similarities between secured and unsecured credit cards. Both send cardholders a monthly statement either by mail or electronically.

The monthly statement outlines purchases, payments, and any interest accrued.

Both cards require payment by the due date. If you pay the balance in full by the due date, you do not pay interest.

But, if you choose, you can carry a balance on either credit card. If you do, you will be charged interest. The interest rate varies depending on the credit card you choose.

Either card could have an annual fee. Read the fine print carefully to find out if your credit card has one. If it does, then you will have to pay interest and a yearly rate once every year.

That annual fee could be as low as $39 or as high as $150, depending on the type of card.

Also, both secured and unsecured credit cards send reports of your payment patterns to the three major consumer credit bureaus. That means even if you have a secured card with a low limit, you will impact your future credit ratings by making timely payments.

After a year of using your secured credit card wisely, you will likely be approved for an unsecured credit card.

Secured vs Unsecured Credit Card – Differences

The main difference between secured vs unsecured credit cards is secured cards are much easier to get.

No matter your credit score, age, or how long you’ve been in the country, you can get a secured credit card in your name.

Also, with a secured credit card, you are limited to the amount of money you can afford to deposit. With an unsecured card, your credit limit is based on your credit score. To get a card with great perks, you’ll need a decent credit rating.

When to Choose a Secured Credit Card

There are specific scenarios when choosing a secured credit card vs unsecured makes more sense.

If you have trouble managing your money responsibly, a secured card is your best bet. If you are trying to rebuild your credit after bankruptcy, foreclosure, collections, or a bad repayment history, a secured card is a good idea.

A secured credit card can help you limit your spending to a reasonable amount. It will also ensure you don’t get into serious debt you could struggle to repay.

If your credit isn’t stellar and you’ve had to resort to payday loans online in the past, you might still get approved for an unsecured credit card. However, that card may have a high fee or high interest rates. You can avoid both by opting for a secured credit card instead.

How to Rebuild Your Credit with a Secured Credit Card

Using a secured credit card is a great way to rebuild your credit if you normally need to use bad credit loans. You can do this by following these tips.

First, use your credit card for small purchases. Consider paying for your gas, groceries or lunch on the go using your credit card. Your credit limit likely won’t be very high, so it makes sense to make multiple smaller purchases than one large one.

Always keep track of how much you are spending. Be smart and only charge how much you can afford to pay off. If you can, pay off the full balance each month. That way you avoid paying interest.

If you do need to carry a balance, keep your balance much lower than your credit limit. If your balance is close to the credit limit, this hurts your credit score.

Finally, make sure you pay your bill on time each month. This is the most important rule of having a credit card.

Set your bill payment as an automatic payment from your banking account. Then you don’t have to worry about ever being late.

Bottom Line

Thanks for reading. We hope this guide about the differences between a secured vs unsecured credit card helps you understand which type of card is best for you.

Did you know that there are also secured and unsecured loans? Check out the pros and cons of each. Here are some other articles that might be helpful:

Your guide to bad credit personal loans guaranteed approval $5,000
How to find the best personal loans guaranteed approval
The best unsecured credit cards for bad credit you can get now
Best options for payday loans online direct lenders only