What is difference between secured and unsecured credit card

Choosing the right credit card can feel overwhelming, especially with so many options available. Two common types are secured and unsecured credit cards. While both allow you to make purchases on credit and build a credit history, they operate quite differently. Understanding these differences is crucial to selecting the card that best suits your financial situation and goals. This comprehensive guide will break down the key distinctions between secured and unsecured credit cards, helping you make an informed decision.

What is an Unsecured Credit Card?

An unsecured credit card is a traditional credit card that doesn't require a security deposit. The credit card issuer grants you a line of credit based on your creditworthiness, which is assessed by reviewing your credit report, credit score, income, and other financial factors. If you have a strong credit history and a good credit score, you are more likely to be approved for an unsecured credit card with favorable terms, such as lower interest rates and higher credit limits.

Key Features of Unsecured Credit Cards:

• No Security Deposit Required: This is the most significant difference. You don't need to put down any money to open the account.
• Credit Limit Determined by Creditworthiness: Your credit limit is based on your credit history and financial profile. Those with excellent credit may receive high credit limits, while those with fair credit may receive lower limits.
• Potentially Lower Interest Rates for Good Credit: If you have a good to excellent credit score, you're likely to qualify for cards with lower annual percentage rates (APRs).
• Rewards and Benefits: Many unsecured credit cards offer rewards programs such as cash back, travel points, or miles. They can also come with benefits like purchase protection and travel insurance.
• Impact on Credit Score: Responsible use (making on-time payments and keeping your credit utilization low) can significantly improve your credit score. However, missed payments or high credit utilization can negatively impact your score.

Who are Unsecured Credit Cards Best For?

Unsecured credit cards are generally best for individuals who:

• Have a good to excellent credit score (typically 670 or higher).
• Have a stable income.
• Have a responsible financial history.
• Are looking for rewards and benefits associated with credit card usage.

What is a Secured Credit Card?

A secured credit card is a type of credit card that requires you to provide a security deposit to the credit card issuer. This deposit serves as collateral for the line of credit. The credit limit on a secured credit card is typically equal to the amount of the security deposit. Secured credit cards are often used by individuals with limited or poor credit history who may not qualify for an unsecured credit card.

Key Features of Secured Credit Cards:

• Requires a Security Deposit: This is the defining characteristic. The amount of your deposit typically determines your credit limit.
• Security Deposit Acts as Collateral: If you fail to make payments, the issuer can use the security deposit to cover the outstanding balance.
• Easier Approval with Limited or Bad Credit: Secured cards are generally easier to obtain than unsecured cards, even with a less-than-perfect credit history.
• Opportunity to Build or Rebuild Credit: Responsible use of a secured credit card can help you build or rebuild your credit history.
• Potential for Graduation to an Unsecured Card: Many issuers offer the opportunity to "graduate" to an unsecured credit card after demonstrating responsible credit use for a certain period (typically 6-12 months).
• Typically Higher Interest Rates: Secured credit cards often have higher APRs than unsecured cards, reflecting the increased risk for the issuer.

Who are Secured Credit Cards Best For?

Secured credit cards are generally best for individuals who:

• Have a limited or poor credit history.
• Are trying to rebuild their credit after facing financial challenges.
• Have been denied approval for an unsecured credit card.
• Are willing to provide a security deposit.

Secured vs. Unsecured Credit Card: A Detailed Comparison

To further clarify the differences, let's compare secured and unsecured credit cards across several key factors:

Factors to Consider When Choosing Between Secured and Unsecured Credit Cards

Before deciding which type of credit card is right for you, consider the following factors:

• Your Credit Score: Check your credit score to understand your creditworthiness. You can obtain a free credit report from AnnualCreditReport.com.
• Your Credit History: Review your credit report for any negative marks, such as late payments, collections, or bankruptcies.
• Your Financial Situation: Assess your income, expenses, and debt levels.
• Your Goals: Determine what you want to achieve with the credit card, such as building credit, earning rewards, or making everyday purchases.
• Security Deposit Requirement: Can you afford the security deposit required for a secured credit card?
• Interest Rates and Fees: Compare the interest rates and fees of different credit cards.
• Rewards and Benefits: Consider whether you value rewards and benefits, and choose a card that offers the types of rewards you want.

Building Credit with a Secured Credit Card: Tips and Best Practices

If you choose to use a secured credit card to build or rebuild your credit, follow these tips:

1. Make On-Time Payments: Payment history is the most important factor in your credit score. Always pay your bills on time, every time. Consider setting up automatic payments to avoid missing due dates.
2. Keep Your Credit Utilization Low: Credit utilization refers to the amount of credit you're using compared to your total available credit. Aim to keep your credit utilization below 30%, and ideally below 10%. For example, if your credit limit is $500, try not to spend more than $150 each month.
3. Use Your Credit Card Regularly: Use your card for small purchases each month and pay them off in full. This demonstrates responsible credit use and helps you build a positive credit history.
4. Monitor Your Credit Report: Regularly check your credit report for errors and signs of identity theft. You can get a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) annually.
5. Avoid Applying for Multiple Credit Cards at Once: Applying for multiple credit cards in a short period can lower your credit score.

Graduating from a Secured Credit Card to an Unsecured Credit Card

After demonstrating responsible credit use with your secured credit card for a period of time (typically 6-12 months), you may be eligible to graduate to an unsecured credit card. This means that the credit card issuer will return your security deposit and convert your secured card into an unsecured card. To increase your chances of graduating:

• Make On-Time Payments Consistently: A perfect payment history is crucial.
• Keep Your Credit Utilization Low: Demonstrate that you can manage your credit responsibly.
• Check with Your Issuer: Contact your credit card issuer to inquire about their graduation policies and requirements.

If your issuer doesn't offer graduation, you can consider applying for an unsecured credit card from another issuer once your credit score has improved. Before applying, check credit card comparison websites to find cards that are a good fit for your credit profile.

The Bottom Line

Choosing between a secured and unsecured credit card depends on your individual credit situation and financial goals. Unsecured credit cards are ideal for those with good to excellent credit, while secured credit cards are a valuable tool for building or rebuilding credit. By understanding the key differences between these two types of credit cards, you can make an informed decision and take control of your financial future.