If you are looking for a credit card, you may have come across two different types: secured and unsecured. What are the differences between them, and which one should you choose? In this blog post, we will explain everything you need to know about secured vs unsecured credit cards, and how they can affect your credit score and finances.
What is a secured credit card?
A secured credit card is a type of card that requires a cash security deposit when you open the account. The deposit reduces the risk to the credit card issuer: If you don't pay your bill, the issuer can take the money from your deposit. That's why these cards are available to people with bad credit or no credit.
The deposit is usually equal to your credit limit, so if you deposit $200, you'll have a $200 limit. You can use the card anywhere that accepts credit cards, but you still have to pay your bill on time every month. If you don't pay the bill in full, you'll incur interest charges, which are often higher than average credit card interest rates.
Your deposit will be refunded once you've proved your creditworthiness by keeping the account in good standing or when you close the account. Some secured cards also charge an annual fee, and they may tack on application processing or monthly maintenance fees.
What is an unsecured credit card?
An unsecured credit card is a type of card that does not require a security deposit when you open the account. The issuer relies on your credit score, income, and other factors to determine your approval, credit limit, and interest rate. These cards are more suitable for people who have good or excellent credit.
Unsecured cards typically have lower interest rates and fees than secured cards, and they may offer better perks and rewards, such as cash back, points, or miles. You can also increase your credit limit over time by making timely payments and maintaining a low balance.
However, unsecured cards also have higher standards for approval, and they may perform a hard inquiry on your credit report when you apply. This can temporarily lower your credit score by a few points. If you miss payments or default on your account, you can damage your credit score and incur late fees, penalty rates, and collection actions.
How do secured vs unsecured credit cards affect your credit score?
Both secured and unsecured credit cards can help you build or improve your credit score if you use them responsibly. They both report your payment history and balance to the three major credit bureaus: Experian, TransUnion, and Equifax. These two factors make up 65% of your FICO score, which is the most widely used scoring model.
To boost your credit score with either type of card, you should:
- Pay your bill on time every month. This shows that you are reliable and trustworthy with credit.
- Keep your balance low relative to your limit. This lowers your credit utilization ratio, which is the percentage of available credit that you are using. A lower ratio indicates that you are not overextended with debt.
- Keep your account open for as long as possible. This increases your average age of accounts, which reflects how long you have been using credit.
- Avoid applying for too many new accounts in a short period of time. This reduces the number of hard inquiries on your report, which can lower your score temporarily.
Which type of card should you choose?
The answer depends on your personal situation and goals. Here are some questions to ask yourself before applying for a secured or unsecured card:
- What is your current credit score? If you have bad or no credit (below 580), you may have a better chance of getting approved for a secured card than an unsecured card. If you have good or excellent credit (above 670), you may qualify for an unsecured card with better terms and benefits.
- How much money can you afford to deposit? If you don't have enough cash to make a security deposit for a secured card, or if you need that money for other purposes, an unsecured card may be a better option. However, if you have some extra cash that you can set aside for a while, a secured card may help you.