Secure vs. Unsecured Credit Cards: Which One Is Right For You?
“An unsecured credit card? A credit card is just a credit card, isn’t it? We can see the questions running through your head.
Usually when you refer to a credit card it is an unsecured credit card as the majority of credit cards used fall into this category. An unsecured credit card might not be right for you if you are new to credit and trying to build a credit history.
So what’s the difference between a secured and unsecured credit card? Follow us, as we disentangle these two types of credit cards, explain the main differences, and help you make the right choice!
|In one look|
|Secured credit card||Unsecured credit card|
|A secured credit card is issued against collateral like a fixed deposit, making it a safer proposition for banks.||These are credit cards with no guarantees and are issued based on other factors such as credit history, income etc.|
Secured credit cards
A secured credit card is approved against the security of a fixed deposit, which is controlled by the bank. It serves as a guarantee in the event of default or regular non-payment of your contributions. Since secured credit cards are issued primarily to people with little or no credit history, this poses a higher risk for banks. The term deposit is the bank’s way of protecting itself against possible losses.
This is also beneficial for you, as the fixed deposit continues to earn interest.
Secured credit card activity shows up on your credit history, which helps build your credit score. However, double check to make sure your report is free of errors and that your card activity is being reported to the credit bureaus.
Unsecured credit cards
Unsecured credit cards do not require a security deposit. Banks approve them based on various factors that rank you based on your ability to make payments on time. These factors include a strong credit profile, adherence to a certain income bracket, valuation of existing debt, etc. Unsecured credit cards generally have lower interest rates and come with valuable features such as repayment options and reward programs.
Choose unsecured credit cards based on your lifestyle and usage. This brings us back to zero again – your budget. Analyze where you are spending the most money each month (groceries, fuel, entertainment, etc.) and try to match a card with those categories.
Secure vs. unsecured: which one to choose?
A secure credit card is for you if you
- want to build and improve your credit history
- are keen to develop responsible credit behavior
- want to take advantage of shorter approval times
- just started working
Secured credit cards are convenient to start with, but they are limiting. In addition to requiring collateral, they offer low credit limits and the money in your fixed deposit is not available to you while you are using the card.
An unsecured credit card is for you if you
- already have a good credit history
- looking to add lines of credit
- have been working for a few years and meet the income requirements
- want specific rewards programs and benefits like travel points, lounge access, etc.
An unsecured credit card looks tempting. But you might also have to pay annual fees, wait long approval times, and be careful not to go over budget.
Both secure and unsecured credit cards have their pros and cons. Whichever card you choose, it is imperative not to miss or delay payments. Ultimately, many financial decisions come down to having a clean credit history and a good credit rating, and both secure and unsecured cards help you shape them.
About the Author:
Vikas Kothari is the founder of P10 Bank, a digital banking startup designed for young working professionals.
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Article first published: Sunday, December 20, 2020, 9:00 a.m. [IST]