The Basics: Secured Credit Cards Versus Unsecured

There are two types of credit cards – secured and unsecured. But what’s the difference?

macro money Image by Flickr creative commons user kevin dooley

About Secured Credit Cards:

What makes it “secured” is that you will put a deposit down on this card. Your credit limit will generally be equal to the deposit that you make. So if you deposit $500, your limit will be $500. Banks can also choose to reward you for responsible management of the card by extending your line of credit beyond the amount of your deposit. The point is to improve bad credit or to establish nonexistent credit. This may be a good idea for people who would likely be turned down for an unsecured card.

You can apply for a secured card at many different banks or credit unions. To choose your card wisely, you should look at widely varying factors such as:

  • Application fees
  • Monthly or annual fees
  • Interest rate

Beware of cards that charge you an “insurance” fee every month. You should pay off your total balance on a secured card every month, rather than allowing a balance. Secured cards are generally not supposed to be used for the long-term, but only until you build credit and then are offered a reasonable unsecured card. After you close the secured card, you’ll get your deposit back.

 Unsecured Credit Cards:

An unsecured credit card is a “normal” credit card, meaning that you do not have to make an initial deposit like you do with a secured card. This may be more difficult to apply for if you have bad credit. Like with a secured card, when choosing the best card for you, look at interest rates and fees. However, with an unsecured card you may be eligible for rewards and incentives. You may want to keep a balance less than the credit limit.

With applying for and managing any type of credit card, it is important to keep in mind the following:

  • Be careful when applying for any type of credit card online – make sure the website is secure
  • Make timely payments
  • Find out whether or not your card reports to the major credit bureaus

Ask a representative from your bank or a financial adviser what type of card is right for you. Establishing good credit is important for everything from renting an apartment to applying for a loan. Remember to make wise, informed credit decisions and you’ll be on the road to good credit in no time!