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If you’re interested in getting a new credit card, but you don’t have a lot of credit history, then you’ve probably come across secured credit cards in your research. You also probably wondered what is the difference between a secured and unsecured credit card?
An unsecured credit card is the standard kind of credit card that most people have.
When you’re shopping around for credit cards, you don’t want to just pick the first one that you come across. You should be very meticulous and make sure that the card you get is appropriate for your financial situation.
While both unsecured and secured credit cards have a lot in common, there are several important differences between them. So continue reading and we’ll go over everything you’ll want to know about these two types of credit cards.
What Is a Secured Credit Card?
A secured credit card is mostly the same as an unsecured credit card. The main difference between these two cards is that you have to make a minimum deposit in order to get a credit limit. This minimum deposit is known as a security deposit.
The deposit is usually $200. However, depending on the specific card that you get, you might have to pay more or less on the security deposit.
Secured credit cards are often marketed toward individuals who are trying to build or rebuild credit. Because of this, the security deposit is used as a form of collateral in case you default on your payments. However, the security deposit is totally refundable if you pay your balance off in full and close your account.
You can also get your security deposit refunded back to you if you decide to upgrade to an unsecured card.
Some credit card companies will give you a secured credit card at first. Then, after several months, they will review your account and decide if they’ll give you your security deposit back.
How Secured Credit Cards Work
After you pay the security deposit, you can then start to use your secured credit card just like how you would any other kind of credit card. You can spend up to the assigned credit limit, which is usually equal to what your security deposit is. So, if you have a $200 security deposit, then you’ll also have a credit limit of $200.
If you want to be able to spend more, then you’ll have to deposit more money. The maximum amount of money that you can deposit will vary based on the card that you get. However, the limit can sometimes be up to $2,500.
There are also some secured credit cards that offer a higher limit without any additional security deposit. This is available after you make several monthly payments on time. It’s also a helpful incentive for you to practice proper credit behavior.
If you carry a balance from one month to the next, then you’ll have to pay interest charges. Because of this, you need to make sure that you pay your bill on time and in full each month. This will also help you improve your credit score.
The actions that you perform with your secured credit card will be reported to the three main credit bureaus – TransUnion, Equifax, and Experian. It’s important that you don’t max out your credit card and that you pay off your balance every month.
Unsecured Credit Cards Vs. Secured Credit Cards
Are you trying to see if you’d be better off with an unsecured credit card or a secured one? If so, then your credit score will probably be the main deciding factor.
If your credit score isn’t great, then you may want to go with a secured credit card. That’s because these cards tend to be easier to qualify for if you have poor credit or no credit. Any credit score below 580 is generally considered to be poor.
If your credit is already in excellent or good shape (credit scores of 670 or higher), then you may want to go with an unsecured credit card. These cards tend to offer bigger benefits that can earn you rewards in common spending expenditures, such as groceries, gas, and dining.
If you feel that a secured credit card is going to be the best pick for you, it’s good to remember that you can transition to an unsecured later as you build your credit.
If you’re not able to pay for the $200 security deposit, then you should look for other ways to increase your credit score. This can include becoming an authorized user on another person’s account. You also might want to look for a credit card that’s designed for people who have low credit and don’t need a deposit.
The Importance of Knowing What Is the Difference Between a Secured and Unsecured Credit Card?
Hopefully, after reading the above article, you now feel that you have the answer to the question, “what is the difference between a secured and unsecured credit card?” As we can see, there isn’t really one kind of card that’s necessarily better than the other. It really all just comes down to what your specific financial situation is like and which kind of card is going to best benefit you.
While building or rebuilding credit is never easy, it’s still extremely important to do. Our credit education services can help you in challenging credit bureaus to remove inaccurate information from your credit report. We can also help you maximize your financial opportunities while restoring your credit score.
Contact us today and see what we can do for you!