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What’s the Difference Between Unsecured and Secured Credit Cards?

What’s the Difference Between Unsecured and Secured Credit Cards?

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• Updated: March 10, 2023

With all of the credit cards available on the market today, it is easy to get confused.  Let’s look at two primary categories of credit cards:  unsecured and secured.

Unsecured credit cards are what most people think of when they hear the words “credit card”:  banks look at your credit score, and then offer you a card with an interest rate and credit limit based on that score.  The higher your credit score, the more likely you are to receive credit card offers with sign-on bonuses and attractive terms.  If you fail to make a payment, your credit score will likely decrease, but the issuing bank can’t require that any of your assets be seized in order to satisfy the amount owed.

Secured credit cards differ from unsecured cards in several significant ways.

● Secured cards require users to make a deposit, which the card issuer will use as collateral and then set as the card’s credit limit.  If the card user fails to pay off the balance, that deposit will then be seized by the issuing bank.  So, if your deposit is $500, you can only charge up to $500 in purchases on that card.  If you don’t make $500 in payments, you lose that $500 deposit.

● Many secured cards will have an application fee.

● Secured credit cards often offer consumers a chance to build - or rebuild - a credit history, by making payments on time and paying off the balance.

If you’re considering a secured credit card, you’ll want to keep a few things in mind.  First, make sure that the card will be reporting to one, if not all, of the major credit bureaus; if you’re trying to (re)establish a credit history, this is essential.  Also, be sure to check out all of the fine print, especially with respect to fees:  you don’t want all of your deposit to be used up by card fees instead of purchases!  Finally, ask the card issuer what you will need to do to eventually qualify for an unsecured card; credit card companies want to keep your business, and with a good track record of on-time payments, you should be able to switch to a less-restrictive unsecured card within a certain period of time.

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