Unsecured credit

What is the difference between secured and unsecured credit cards?

“[Credit is a system whereby] a person who cannot pay gets another person who cannot pay to guarantee that he can pay.
– Charles Dickens

As Charles Dickens describes it, credit sounds like a wonderful, miraculous thing. It doesn’t quite work that way, however. Most of us have unsecured credit cards, often having them pre-approved and filling out a brief application. Those with bad or no credit, however, must spend time building credit reports or rebuilding credit scores. Their best option is to get a secure credit card, backed by a deposit they make.

Image source: Getty Images.

Here’s an overview of the difference between secured and unsecured credit cards, along with tips on finding good ones.

Secured and unsecured credit cards: setting the scene

Credit card companies are always on the lookout for more customers. They send pre-approved offers in the mail by the millions, all year round, and you’ll see offers online too. But they won’t give just anyone a card. After all, it’s their money that’s at stake when you use their credit card. They pay for your purchase for you – and then expect you to pay them back.

Thus, they want to be reasonably sure that you will pay off your debts. To get a feel for your creditworthiness, they will look at your credit score, which reflects your credit history – how well you are able to pay your bills on time, how much you owe, etc.

If you know your credit score, you might be wondering now how good it is. Well, the basic FICO scores, which are used by about 90% of the major lenders, range from 300 to 850. Here’s how the people at FICO assess the scores:

FICO Score Range

Evaluation

Probability that the borrower will become delinquent

800 and more

Exceptional

1%

740-799

Very well

2%

670-739

Good

8%

580-669

Fair

28%

579 and less

Poor

61%

Data source: MyFICO.com.

So if you have a bad credit score – or if you haven’t borrowed money before, you have no credit score at all – a lender naturally won’t be eager to issue you a card – unless that it is not guaranteed.

Here are the elements of a FICO credit score – it can be helpful to know them if you need to increase your credit score.

Component of the credit score

Influence on credit rating

Payment history

35%

How much you owe

30%

Length of credit history

15%

New credit

ten%

Other factors such as your credit mix

ten%

Data source: myFICO.com.

And lest you understand how much a good credit score can make a difference in your life, check out the following recent mortgage payments and interest payments for a 30-year $ 200,000 fixed rate mortgage. :

FICO score

APR

Monthly payment

Total interest paid

760-850

3.568%

$ 906

$ 126,051

700-759

3.79%

$ 931

$ 135,080

680-699

3.967%

$ 951

$ 142,371

660-679

4.181%

$ 976

$ 151,294

640-659

4.611%

$ 1,027

$ 169,577

620-639

5.157%

$ 1,093

$ 193,449

Data source: MyFICO.com.

Secure vs. Unsecured Credit Cards: What’s the Difference?

Most of us have unsecured credit cards. They don’t require any deposit from us – we just charge and then refund. Those who cannot get approval for an unsecured card, due to poor credit or no credit, can still get a car – a secure car, backed by money we deposit. on an account that prevents the credit card company from being left in the lurch.

It’s kind of like a mortgage or a car loan – which is secured by a house or a car, as collateral. If you do not meet your payments, the lender can claim this property. A personal loan that you get from your bank or from a friend may or may not be secured, but it is often unsecured. Most credit cards are also not guaranteed. There is no collateral protecting the lender. When you rent an apartment, you will likely pay a security deposit, similar to a secured credit card, in that the landlord can keep that deposit if you default on your obligations.

torso of a man in a suit, standing with his arms crossed between arrows pointing left and right, with the words

Image source: Getty Images.

Secure credit cards – choose them and use them wisely

Getting and using a secured credit card can seem overwhelming, but it’s a good way to build up your credit history and credit rating that will allow you to approve better unsecured cards. Some secure cards can be converted to unsecured cards at a later date, which can reduce the hassle factor a bit.

No matter how much you deposit into your secure card account, your credit limit will actually be. It will remain in your account, allowing you to charge that amount and pending reimbursement. If you don’t pay off your debt, the card company may just keep the money. If you close the account or switch to an unsecured card, you will get your deposit back.

When looking for a secure credit card, look for one with no annual fee or one with a fee of no more than $ 50. Try to avoid paying administration fees and beware of other fees that might be present.

Beware of temptations to get an unsecured card that is advertised as endorsing people with bad credit, as it could charge astronomical interest rates and / or fees. Think twice before you solve your plastic card problem with a prepaid debit card as well, as this will not serve to establish a credit history or help you down the path to an unsecured card.

Here is a list of some of the best secured credit cards. Once you have your secure card in hand, make sure you are using it responsibly, paying bills on time. This will help establish you as a trustworthy borrower and help you build a good credit history and a good credit rating. It will often take about a year of responsible use of a secure card to be ready for an unsecured card.

sign indicating three directions, with the words

Image source: Getty Images.

Unsecured credit cards – choose them wisely too

Once you are able to qualify for an unsecured credit card – which could be the case now – you will still need to be careful when getting one. Not all cards are created equal, and some will serve you better than others.

If you already have a lot of credit card debt, you will need to pay off the credit card debt and any other high interest debt as soon as possible. Credit cards with balance transfer and low interest credit cards can be good for this. Great credit cards with balance transfer won’t charge you interest for several months while you work to pay off your debt, while great, low-interest credit cards can help you spend less on interest payments. .

If you’re not heavily in debt, consider getting a couple of great cash back credit cards that will give you cash back or rewards that can be redeemed. Some cash back credit cards offer a fixed percentage on all purchases. Others have percentage levels that apply to different categories of expenditure. Still others offer big rewards on purchases in specified expense categories that change every few months. Some cards offer a combination of these features.

To get the most out of one or more cash back credit cards, think about your spending habits. For example, if you charge a lot in many different places, you might opt ​​for a general purpose refund card. You will find general cards paying up to 2% on everything. There are many major retailer credit cards that offer you discounts when you shop with them.

A particularly powerful niche in the reward card world is the travel card. The best travel credit cards will reward you for your travel-related expenses, often including restaurants, and / or offer discounts on those expenses.

Here are some cool features you might want in whatever card you want:

  • Generous Sign Up Bonus: Some credit cards, especially those related to travel, offer generous bonuses when you sign up for a card. You might need to spend a certain amount in the first few months, but then you can get points or some other reward in return.
  • No annual fee. Most credit cards don’t charge an annual fee. Note, however, that if a card charges, say, $ 99 per year, and delivers, say, $ 200 or more in value, then the charge may be worth it. Even a few $ 500 in annual fees strength worth it, but walk carefully over such terrain.
  • No APR penalty. An APR penalty is what happens when card companies increase your interest rate, often to 25% or more, if you pay a late bill. Look in the fine print of a card to see if there is an APR penalty, as many cards do not have this feature.
  • Low interest rates. If there is a chance that you will occasionally have a balance, you should favor cards with a relatively low interest rate range.
  • No foreign transaction fees. Without this feature, if you spend money overseas or at an overseas-based retailer, you will see a foreign exchange charge on your statement.
  • Other Fees: Find out what fees a card will charge you, such as paying your bill over the phone, getting a cash advance, late paying, going over your credit limit, and more. Think about what services and / or fees might apply to you and what the card might cost you.

Credit cards are not only very convenient when we want to pay for things, they can also help us build our creditworthiness for other financial needs, such as mortgages or car loans.


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