Unsecured credit

How to Choose Between Secured Credit Cards and Unsecured Credit Cards

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Credit cards are a popular payment option in the United States. About 196 million Americans use them. That’s an impressive number considering that there are only about 333 million people in the United States. That means more than half of Americans have one of these rectangular pieces of plastic in their wallet or wallet.

Read: If Your Credit Score Is Below 740, Do These 4 Moves Now

But not all credit cards are created equal; there are several different types. Nevertheless, they all fall into one of two categories – secure and insecure. When it’s time to apply for a new credit card, you might be wondering which is better, a secured or unsecured credit card.

How Secured Credit Cards Work

Secured credit cards are designed for borrowers with limited credit histories or poor credit scores. You can use these credit accounts to improve your credit scores, which allows you to access new credit accounts with more favorable interest rates and terms.

Secured credit cards work like unsecured credit cards. You can use unsecured credit cards to make payments in person or online. When you make purchases, you have to pay them back, which you can do over time, and pay the interest the bank charges to lend the money.

The biggest difference between secured and unsecured credit cards is that banks require applicants to make a deposit on secured options. This security deposit becomes the account’s credit limit. The bank usually returns the security deposit after the borrower has used the card responsibly for a predetermined amount of time.

How unsecured credit cards work

Unsecured credit cards are credit cards that do not require collateral, as is the case with their secured counterpart, a security deposit. This is the type of credit card most people think of when adding a new one to their wallet. Unsecured credit cards generally require higher credit scores and income to be approved.

When you use an unsecured credit card to make a purchase, the bank adds the value of the purchase to your credit account balance. You can choose to pay the balance in full or make monthly payments. If you make monthly payments on your balances, you will have to pay interest as you pay off the debt.

The most important factor with unsecured credit cards is that the lender only has the cardholder’s word to fall back on when it comes to payment expectations. This is different from secured credit cards because if the borrower does not pay as agreed, the lender takes the security deposit to cover the cost of the credit they have extended.

How to Choose Between Secured Credit Cards and Unsecured Credit Cards

When it’s time to decide whether to apply for a secured credit card or an unsecured credit card, there are a few factors that should play into your decision:

  • Credit scores. Unsecured credit cards require applicants to have higher credit scores than their secured counterparts. This means that if you have credit issues, you should consider secured credit cards instead of trying to get approved for an unsecured option.
  • Revenue. Most unsecured credit cards come with higher income requirements than secured options. If you have a limited income, you may find it difficult to get approved for an unsecured option. You might want to look at secure cards first.
  • Awards. The vast majority of secured credit cards do not come with rewards such as cash back or travel points. Consider unsecured options when opening new credit card accounts to earn rewards when making purchases. However, there are a few exceptions to the rule, including the Discover it® secure credit card that offers cash back.

How to choose the best credit card for bad credit

Secured credit cards are generally the best option for those with poor credit ratings. Here are some things to consider when comparing your options:

  • Security deposit. All secured credit cards require you to make a security deposit. The size of this deposit can vary enormously from one option to another.
  • Interest. Credit card companies charge borrowers interest when they carry over balances from month to month. You can find each card’s interest rate in its terms and conditions, and you should compare your options to try and get the lowest possible interest rate on your card.
  • Annual fees. Most secured credit cards charge an annual fee. This helps reduce the lender’s risk. However, some options do not charge this fee. It’s often a good idea for you to avoid as many fees as possible when it comes to credit cards.
  • Awards. Although most secured credit cards do not offer rewards, there are exceptions. You should consider reward options when making your decision.

Final grip

If you find yourself weighing the options of secured and unsecured credit cards, just know that a secured credit card can help you build your credit and get approved for other credit accounts with reasonable terms. Consider applying today to start your credit improvement journey.

Secured and Unsecured Credit Card FAQs

If you’ve just learned about secured and unsecured credit cards, you probably have quite a few questions. Here are answers to some of the most common.

  • Which is better: a secured or an unsecured credit card?
    • Unsecured credit cards generally offer better interest rates and rewards than their secured counterparts. However, a secured credit card is best for those with difficult credit, as approval is usually easier than unsecured options.
  • Do secured cards generate credit faster?
    • Secured credit cards can help you improve your credit. With proper management and careful use, you might see an increase in your score over time.
  • What is the difference between unsecured and secured credit cards?
    • There are a few differences between secured and unsecured credit cards:
      • – Secured credit cards require a security deposit. Unsecured cards do not.
      • -Secured credit cards generally charge higher interest and annual fees.
      • – Secured credit cards are easier to obtain than unsecured credit cards.
      • -Unsecured credit cards generally offer better rewards.
  • What are the two disadvantages of a secured credit card?
    • – Secured credit cards require a security deposit.
    • -They generally charge higher interest and fees than unsecured cards.

Barri Segal contributed reporting for this article.

Information is accurate as of October 27, 2022.

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