Secured vs. Unsecured Credit Cards

If your credit file causes you to lose sleep at night, and creditors frown on your loan applications, then perhaps you should consider a secured credit card. 

However, before you run off to acquire your new found plastic friend, you should know the advantages and disadvantages of both secured and unsecured credit cards.

Unsecured Credit Cards

Advantages

• Does not require you to open and maintain a savings account as security for your line of credit
• No security deposit is required for unsecured credit cards.
• People with past credit problems may still qualify 
• An unsecured credit card can be an effective way to build or re-establish a credit record.
• The Annual Percentage Rate is significantly lower than that of a secured credit card.
• Unsecured cards normally do not require an application fee.
• Your credit limit is normally based on your credit worthiness.

Disadvantages

• Most unsecured credit cards do not require an annual fee. However, some cards do carry a relatively low annual fee of $20 to $85.

Secured Credit Cards

Advantages

• Even people with poor credit may be approved for a secured card.
• A Secured credit card can be an effective way to build or re-establish a credit record through monthly reporting to credit bureaus.
• It can be used like an unsecured credit card.
• Your deposit usually earns interest.
• f you keep your account in good standing your credit line may be increased automatically after 12 months with no additional deposit necessary

Disadvantages

• A secured card requires you to open and maintain a savings account as security for your line of credit
• Secured credit cards requires a security deposit. the amount may vary from hundreds to thousands of dollars (depending on your credit history).
• Your credit line is usually limited to the maximum or percentage of your deposit amount.
• You may have to pay application and processing fees. In addition, a typical secured card requires an annual fee and has a higher interest rate than an unsecured card.
• Most secured cards have an annual fees ranging from $20 to $60.
• Some secured cards actually charge you interest rates on your own deposit.
• Depending upon the issuer's policy, you may not be able to withdraw this money until the account is closed.
• If you don't pay the bank on time each month, the issuer may withdraw the amount you owe from the savings deposit

This may sound as if the secured card is not a good choice, but it may be appropriate if you have a less than perfect credit history. As you pay your bill on time each month, it helps you build a positive credit history.

Other Considerations

There are three things you should determine when shopping for a secured credit card:

• Before you apply, be sure to ask if the bank if they will pay interest on your deposit, what the total fees are, and whether they will be refunded if you're denied a card.
• Ask the issuer to explain its policy regarding credit bureau reporting. It does you no good to work hard on establishing a positive payment history only to find out the bank didn't report it to the credit bureaus. If the credit bureaus don't have the information, future lenders won't have it either.
• Find out if the issuer reports the type of account. If the issuer reports the account is secured, some lenders may speculate that you have had credit difficulties and may consider you a higher risk.

If you need a credit card, and a secured card is your best option, negative credit reporting may be the least of your considerations. But be aware of how it will be handled.

Find the Best Solution for You

There are many ways for banks and retailers to offer you credit. If the issuer you are considering doesn't meet your needs, keep searching for the one that's right for you. Be wary of third parties who advertise credit cards for anyone. These organizations may charge you a fee for processing your application. Compare these products to similar products offered directly by banks and other financial institutions to get the best deal. Eventually, you should find exactly what you need to establish or re-establish credit. After you have built a positive credit history, a bank may find you creditworthy and issue you an unsecured credit card with better terms. To shop for a secured credit card, visit our online application center.