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Most people would prefer to qualify for an unsecured credit card because there is no money required up front. The danger of an unsecured credit card is that credit limits are higher, and it is easy to rack up significant debt with high interest charges.
For those with bad or damaged credit or those who tend to overspend, a secured credit card can be a stepping stone to rebuilding a healthy credit score. Just remember to ensure that the issuer reports your account activity to the credit bureaus: TransUnion, Experian, and Equifax. The better your credit score, the lower your interest rate will be for credit cards and other loans. One good way to improve your credit score is to own a credit card and pay off the balance each month.
If you have a low credit score, it makes sense to obtain a credit card. Even if you can only qualify for a secured card, with good financial management, you can demonstrate your ability to avoid and manage credit card debt. You can lift your credit score to a level where you’ll qualify for an unsecured card.
The Differences Between Secured vs. Unsecured
A secured credit card requires some collateral up front rather like a down payment. It is designed for people who have bad or no credit and are looking for ways to raise it. A secured card works by allowing you to make a ‘down payment’ on your credit card and then charge up to that amount. It’s much safer for the bank because if you don’t pay back your interest or your debt, they can just take it out of your down payment.
An unsecured credit card is usually granted to low-risk borrowers, requires no collateral, and may offer bonuses such as travel rewards, cash back on purchases, store discounts, and interest-free initial periods. Airline and travel rewards cards and low-interest cards are examples of unsecured credit cards.
Interest Rates and Fees for Secured and Unsecured Cards
Secured credit cards tend to charge an annual fee and their interest rates tend to be relatively high — even if you have to put down a security deposit. Interestingly, you do have the advantage of controlling your credit limit because your credit limit is usually the same as the size of your security deposit (each issuer could have a maximum limit).
Many unsecured credit cards charge no annual fee unless you’re applying for premium travel or rewards credit cards. The APRs tend to vary across the board, depending on your credit score. People with higher credit scores are more likely to get lower interest rates. Credit limits, however, are generally determined by the card issuer, which considers your income, credit score, and monthly expenses.
How to Qualify for a Secured Credit Card
Most applicants will be approved for a secured credit card as long as they can pay the security deposit and fees. A bank may also ask for evidence of income and a demonstrated ability to make payments. The US Patriot Act requires that financial institutions verify customer identities and maintain records for national terrorism cases. The Credit CARD Act requires issuers to ensure that applicants can repay debt.
Generally, your existing credit score doesn’t hold too much weight when applying for a secured credit card.
How to Qualify for an Unsecured Credit Card
To qualify for an unsecured credit card, a minimum credit score in the mid-600’s is typically required. For cards that offer rewards, you’re probably going to require a score of at least 700. You’ll also need to ensure that your income and monthly expenses meet the criteria for card eligibility.
Who Should Get a Secured Credit Card
A secured credit card is a good idea if you have bad or no credit but you do have some cash for a deposit. To add points to your credit score, pay off the balance each month and avoid fees and interest payments.
Students, however, might find better credit from banks who offer credit cards just for them.
Homeowners too could be in a position where missed payments on a mortgage or other complications have damaged their credit. A secured credit card might help them in the short-term to rebuild their borrowing capacity.
Someone who tends to overspend could benefit from a secured card because you must live within their means. Your credit limit is typically the amount deposited in advance, you are expected to make on-time payments, and when you close or upgrade the account, your deposit is returned.
Who Should Get an Unsecured Credit Card
Individuals with good credit might find an unsecured credit card a better option because there is often no annual fee. Also, there is no risk of losing a deposit if the balance is not paid on time.
Unsecured credit cards often provide rewards, so, someone who travels a lot with one airline or someone who shops at certain retailers would benefit from a rewards unsecured credit card.
Points to Consider
When choosing between a secured and unsecured credit card, there are some key considerations.
- Your credit score. Generally, if your credit score isn’t terrible, an unsecured card is the go-to option.
- The interest rate. If you can only qualify for a secured card, you probably don’t have the best credit score and may face a high interest rate of over 20%.
- Added fees. Most secured cards charge both an annual fee and a large penalty fee should the borrower go over their limit or miss a payment.
- Low limits. Because the borrower is depositing into their account, if they only have $ 400 to put into the account, there is a high risk of maxing out. Keep track of your spending as maxing out a card can hurt your credit.
In the end, your goal with a secured credit card is to improve your credit score to a point where you can get an unsecured credit card. Paying off your balance every month will get you there. Some card issuers will let you graduate from a secured card to an unsecured card — an easy transition to a life of better credit.