Secured Credit Cards vs. Unsecured Cards

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There are thousands of credit card options available, from banks large and small. When making a decision about which credit card is likely to work best for you, one of the factors you need to consider is whether the card you are getting is a secured credit card or an unsecured credit card.

What is a Secured Credit Card?

A “regular” credit card is one that is unsecured. Such a credit card isn’t backed up with anything beyond your promise to pay it off at some point. However, in some cases you might not be able to get an unsecured credit card. If you don’t have a credit history, or if past mistakes have resulted in a poor credit rating, you might not qualify for an unsecured credit card.

If you can’t get an unsecured credit card, you can apply for a secured credit card. A secured credit card is still considered a revolving line of credit -- a type of loan -- but you have to use collateral to secure the credit card. In many cases, this collateral is in the form of money that you put in a savings account.

You are required to put money in a linked savings account, and if you end up in default on your credit card payments, the credit card issuer can use the money in the savings account to pay on the credit card. It’s important to realize, though, that the money in the savings account isn’t to be used for regular payments; it’s there to secure your loan only. You have to use other money to make your regular monthly payments.

A secured credit card can be helpful in building or rebuilding your credit history, though. The payments you make are reported to credit bureaus, so as you pay on time and pay at least the full minimum each month, your credit score improves. After nine to 12 months of showing your good behaviors with a secured credit card, you can usually get it converted to an unsecured credit card -- and get your collateral back.

Realize that a secured credit card is going to come with a higher interest rate than an unsecured credit card. Additionally, there are usually more (and higher) fees. For many consumers, it makes more sense to try for an unsecured card first, and only get a secured credit card if there isn’t another option.

About Miranda Marquit

Miranda is a freelance writer and professional blogger specializing in financial topics. Her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.

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