Difference between Secured Credit Card and Unsecured Credit Card: Some people are often confused as to what is the difference between secured and unsecured credit cards. These are the two general types of credit cards.
Although used for the same function, these cards are intended for distinct purposes. Understanding their differences can help you choose which type of card is right for you and your current needs.
What are Secured Credit Cards
Basically, by the name itself, a secured credit card is the type of card that requires a security deposit. You will need to open a deposit account to act as security or collateral for you to be able to use your credit card.
Typically, you are required a deposit of up to 200% of your desired credit limit. The deposit varies per card issuer though. This deposit is intended to cover costs if ever the card balance will not be paid.
With this type of card, you will be charged with higher APRs, interests, service charges, and fees on your purchases. Moreover, your payment transactions will be reported to one of the known credit bureaus.
It is for this reason that secured credit cards are recommended for those who are in the process of rebuilding their credit lines as well as those who have no credit history yet.
What are Unsecured Credit Cards
As to what is the difference between secured and unsecured credit cards, the answer lies mainly on the issue of security or collateral for the use of the card. An unsecured credit card does not really require such security or collateral before you can use your card.
An unsecured credit card is the “normal” credit card that you usually encounter as they are being offered vigorously in the market nowadays. Such a card is ideal if you have a fair to the excellent credit line.
In addition to that, an unsecured credit card gains a higher score and is weighted better in the credit scoring formula.
Difference between Secured Credit Card and Unsecured Credit Card
With a secured credit card, you are required to make regular payments just like any other credit card. What is the difference between secured and unsecured credit cards is basically the existence of the collateral deposit in the former.
You cannot use this deposit for monthly payments. Also, you cannot withdraw it while your card is still active or in an open status. After several prompt regular payments (typically after 6 months to 1 year), the said deposit shall be returned and the card issuer might consider switching your card to the unsecured type.