What is the Difference Between Secured Unsecured Credit Cards?
You’ve heard all the horror stories of consumers taking on large amounts of credit card debt. Before applying for any credit it might help to know what the difference between secured unsecured credit cards really means.
Just 33% of millennials have credit cards, with many considering themselves deeply distrustful of borrowed money and banks.
This is seen as a smart financial choice for many adults, who already have high student loan repayments. However, credit cards can be a great tool to manage your finances and build your credit rating.
You have two options: Secured vs unsecured credit cards. Before choosing an option, it pays to know the difference between secured unsecured credit cards? Read on to learn more.
Understanding Credit Scores
Before we get into the difference between secured and unsecured credit cards, it’s important to understand how credit scores work. That’s because your credit score will often impact whether you qualify for an unsecured or secured card.
Your credit score is a number. lenders use it to assess how risky it will be for them to lend you money.
The higher your credit score, the better your financial history. Usually, lenders will use your FICO score which rates how creditworthy you are. This is a score between 300 and 850. Often, this will be broken down into categories within these numbers:
- 630 and under = Poor Credit
- 630- 690 = Average Credit
- 690- 720 = Good Credit
- 720 and above = Excellent Credit
You can get your credit score from the major credit reporting agencies.
What is an Unsecured Credit Card?
When you think about a credit card, it’s likely that you’re thinking of an unsecured credit card. If a borrower has approved you for an unsecured credit card, it means that you have a decent credit score and you’re considered a low-risk customer.
The higher your credit score, the better, and those with excellent credit scores will usually qualify for lower interest rates and the types of unsecured credit cards with the best perks.
There is a massive variety of unsecured cards, making it likely that you’ll find that perfect credit card for you.
It’s a good idea to do some research and compare perks. You may also want to consider how you’ll use your card. If you tend to carry a balance from month to month, a low-interest rate is probably most important. But if you always pay off your monthly balance, you can take a higher interest rate for cash back or great rewards.
What is a Secured Credit Card?
Secured credit cards are funded by your own money. That means that your limit is determined by the amount that you choose to deposit. These are sometimes known as second-chance credit cards since they can be hugely useful for people who have had issues with credit cards in the past or currently have bad credit.
Secured credit cards are also often used by people who have never had any credit before. That’s because they’re great practice for an unsecured credit card, and you can use them to build your credit score.
After six to twelve months of regularly using your secured credit card and making your monthly payments, your credit card company will usually be willing to give you an unsecured credit card.
Before you get a secured credit card, check if they report your payments to the credit reporting companies (TransUnion, Experian, and Equifax). These reports are what build your credit history, improving your credit score.
The Difference Between Secured Unsecured Credit Cards
As you can see, the key difference between secured unsecured card is that with a secured card you’re spending your own money. With an unsecured credit card, you’re borrowing money and paying it back.
So how do you know which credit card is right for you?
Both cards have pros and cons. A secured card is a great option if you have issues with money management. It’s also the best way for you to rebuild your credit.
An unsecured credit card is a good option if you have a great credit rating and can easily qualify for a card with a good interest rate and decent perks.
Tips for Using Your Secured or Unsecured Credit Card
Whether you choose a secured or unsecured credit card, there are a few things you can do to get the most benefits from your card.
Most of the time, using your card for day-to-day purchases is a good idea. Not only is this the best way to earn points, but you’ll be increasing your credit score. But there are a few things you need to consider before you begin spending:
Watch How Much You Use
Your credit utilization rate is a large part of your credit score. This means that it’s better to use a smaller amount of your available credit. If your credit card is maxed out each month, it may signal that you’re in financial trouble.
Sign up for a balance alert so you’ll get an email or text when your credit utilization is nearing 30%. That way you can make a payment before it begins impacting your credit score.
Choose the Right Repayment Date
Missing a repayment on your card is one of the worst things you can do. If you’re finding that your credit card payment is due two days before payday, see if you can switch it. Give your issuer a ring to choose a date that suits you.
Pay it in Full
Many people think that carrying a balance from month to month is good for their credit score. In fact, the opposite is true. The best thing you can do is to clear the debt each month so you’re not charged any interest and you have a low utilization rate.
Hopefully, you now understand the difference between secured unsecured credit cards. As you can see, the right card for you will depend largely on your credit history, money management skills, and whether you can qualify for an unsecured card.
If you don’t have any pre-existing credit, and you’re hoping to build up your FICO score, a secured card will probably be the best option for you.
Bad credit? Check out some of our helpful blog posts about the best bad credit credit cards available today.
Get Control of Your Credit With Our Free Ebook
* indicates required