When you're shopping for a credit card, the options can be overwhelming. While there are many different types of credit cards, they generally fall under two main categories--secured and unsecured. Knowing the difference, as well as pros and cons, of both types of cards is very important.
A secured credit card is one that requires a cash deposit as collateral. This cash serves as your credit limit. For example, let's say you open a secured credit card with $300. You now have a $300 credit limit. You can also add money to your account to increase your credit limit. As you make payments on time and prove your credit-worthiness, your card issuer may raise the limit without requiring additional funds.
Secured credit cards differ from unsecured credit cards in other ways as well, including:
In many ways, however, secured credit cards are still like any other credit card. You can use the card just like you would a typical credit card, and you still have to make payments on it each month. You're also charged interest and fees on the balance you carry.
Secured credit cards are similar to other types of credit that require collateral, such as a home or car. If you default on your home or car payments, the lender forecloses on your home or repossesses your car. If you fall behind on your secured credit card payments, your cash deposit ensures that the credit card company does not lose money.
Unsecured credit cards, on the other hand, do not require a security card or deposit. These are considered the most common type of credit card. The card issuer trusts that you will make the payments on time. While most unsecured credit cards require a fairly good score, the most attractive benefits and lowest interest rates are reserved for those who have excellent credit scores.
The main purpose of a secured credit card is to help you rebuild credit. The cash deposit you put down helps offset a poor credit history or credit score. As you make payments on time, your payments will be reported to the credit reporting agencies.
If you have poor credit or no credit history, a secured credit card is a good option to help you build or rebuilt credit. It’s very important, however, that you make sure you choose a card that reports to at least one credit reporting agency. Because your goal is to improve your credit score, a card that doesn’t report to the agencies will be useless.
If you have a good credit score, your best bet is to choose an unsecured credit card. They offer the most benefits, and they don’t require large cash deposits. Choose a low-interest card that will give you the most bang for your buck through points, rewards, or airline miles.
Credit cards aren’t just for people with great credit. An unsecured credit card is a great option for helping people build or rebuild their credit scores. If you already have good established credit, and unsecured credit card is the way to go.