Secured vs. Unsecured Credit Cards: Which One is Right for You?
Choosing the right credit card seems relatively easy. It can become a bit complicated when you first have a credit card and are starting to build credit, or if you are in the process of trying to rebuild your credit score. In such situations, there are important decisions to make. One is whether you want to start building your credit with either a secured credit card or an unsecured credit card – or possibly both.
So, which type of credit card is ideal? Are secured credit cards better than unsecured credit cards? Under what conditions should you get both of them? Here’s the rundown.
The Differences Between a Secured and an Unsecured Credit Card:
Secured credit cards
Secured credit cards are great for people with no credit card history and those with a poor credit history. If this is you, then a secured credit card is what you need. It will help you build or rebuild your credit history.
These cards are usually backed by collateral. The collateral may be a cash deposit that you make beforehand to the financial institution you want to get the credit card from. The initial amount that you deposit will be your credit limit. For example, if you deposit $300 then your credit limit will be $300. For a $1000 deposit, your credit limit is up to $1000.
These type of credit cards are often issued to subprime borrowers or those with limited credit histories (so-called thin-file borrowers).
Once you have settled on getting a secured credit card, be wary of the fees charged by various credit cards in the market. Some have higher fees and miscellaneous charges. It is important to settle for one that will not charge you exorbitant charges and fees. Those high fees might take up a big chunk of your credit limit. You will end up using your credit funds to cater for the fees and a higher interest rate instead of your expenses.
If you are trying to build or rebuild your credit history, ensure your credit history is reported to the relevant credit agencies. It is the only way agencies can update your credit history. Contact your credit card issuer and ask them.
When you have a sufficient credit history with the agencies, you can switch from a secured to an unsecured credit card. Some credit card issuers do not have an upgrading process. In this case, you will have to close your secured card and apply for an unsecured credit card with the same company (if allowed) or a different company.
You may think that just because you have an advanced deposit, you will be automatically be approved for this type of card. However, your application can be denied if you have filed for bankruptcy before or have a history of late or non-payments, or other red flags. It also depends on the credit card issuer’s policy.
Typically, you will have to make a payment on whatever is due during the billing period. It comes highly suggested that you pay your balance off every month. These cards usually carry higher annual fees and interest rates, so it just makes sense to pay off your monthly balance.
How to increase your credit limit
If you want to increase your credit limit you can do so by adding more money to your initial deposit. If you are good at repaying and building a good payment history, the issuer may ask you if you want them to increase your credit limit. In many cases, the issuer will raise your credit limit without asking or requiring you to add funds in your account.
Start by charging a small amount to the credit card on a regular basis. Keep your credit utilization low (around 10% – 20%). Make sure you do not charge your credit card more than you can afford to pay in full at the end of the month.
Be aware that in case you defaulted on your payment; the issuer will use the money from your deposit to recover from non-payment. Do not take this as a good thing because defaulting will lead to a lousy payment credit report.
Unsecured credit cards
Unsecured credit cards, on the other hand, do not require any collateral. Your credit limit is determined by assessing your credit reports, credit scores, payment history, and your payment ability. The better your report is the higher the credit limit you will get. As with most credit cards, a late payment charge for late payments and a higher interest rate can be implemented as well.
These cards are ideal for people with good and sufficient credit history. These credit card holders enjoy far more benefits than those with secured credit cards.
Apart from these, there are other perks and rewards that come with using an unsecured credit card.
Getting an unsecured credit card that suits your credit score and payment history is not difficult. There are numerous credit card companies out there and they are willing to offer their cards to creditors like you. Credit card companies such as Visa and MasterCard have different types of credit cards available for different people of varying credit status. Again, they are all base on your capacity to pay and payment history.
You can choose between paying your monthly balance in full or have a carrying balance. Carrying balance simply means that you will either be paying a minimum amount or more every month. The rest will be carried forward – a move that is expensive. you will keep paying interest on the outstanding balance even if you pay on time.
Increasing your credit limit
In terms of increasing your credit limit, both cards are treated by the issuing company the same way. If you are paying on time and can show that you deserve a higher credit limit, the banks and other card issuing institutions will permit you to have a higher credit limit.
Some credit card companies like American Express (AMEX) may even be willing to upgrade you to their Platinum Membership card. This card carries no amount limit and includes numerous benefits and perks.
When you try to narrow it down between a secured vs an unsecured credit card, there are only a few differences between the two. The most significant one is the fact that the secured credit card has collateral. If you are looking for a way to build or rebuild your credit history, then the secured credit card is the best way to go, and if you aren’t, go for the unsecured credit card.