If you are thinking about applying for a credit card but don’t know what is the difference between secured and unsecured credit cards we’re here to help.
We’ll look at the differences and similarities between them as well as which one is best for establishing or rebuilding your credit.
Secured & Unsecured Credit Cards: What’s The Difference
If you need to improve your credit score should you consider getting a credit card? The answer to that question is it depends on which kind of credit card.
Secured Card
A secured credit card is one that will allow you to build up your credit score without you getting into debt.
This is because you will need to deposit funds into the account before you can use the credit card. This is a security held against your credit card purchases, and it will determine your credit limit.
It is also easier for those who have no credit history or are trying to rebuild their credit to get a secured card. This is why they are known as second chance cards.
Unsecured Card
An unsecured credit card doesn’t require funding by you, and you will be extended a line of credit based on your credit score and credit history. The credit limit on an unsecured card will be decided by the lender.
Based on how you manage your credit the lender may increase the limit on your credit card.
To get an unsecured credit card you will need a good credit score. If you have an exceptional credit score you may get some added perks with your unsecured credit card.
Which One Is Best For Building Credit?
There are merits to both cards but if you are building or rebuilding your credit you may be restricted to the secured credit card.
There are some good reasons for this.
If you have money management issues a secured credit card will help you to achieve a credit rating without getting yourself into debt. It can help you to live within your means which will help you to develop good credit habits.
By demonstrating that you can use credit wisely and responsibly a secured credit card will help to build your credit profile.
If you have bad credit a secured credit card will usually have lower fees than an unsecured credit card.
Using A Secured Or Unsecured Credit Card To Build Credit
The basic principles of building credit apply to both unsecured and secured credit cards. The lender or card issuer will relay the activity on your account to the credit bureaus.
This includes your payment history, account information and the credit card balance.
If you use a secured credit card to build your credit make sure that the issuer does actually report to the credit bureaus on a regular basis. Not all secured credit card issuer companies will do this so check before you sign up for one.
Using a secured credit card that isn’t being reported to the credit bureaus won’t do anything for your credit rating or score.
A Federal Reserve report said that people who held a secured credit card for two years saw their credit score increase by an average of 24 points.
But of course you need to be careful, missing payments or maxing out your card will have a negative impact.
How A Credit Card Can Help Your Credit
Most credit scoring models don’t care if you have a secured or unsecured credit card and will focus on how you manage your credit above anything else. So how can having a credit card, secured or unsecured help your credit?
Making regular on time payments is the best way to improve your credit score. A consistently good payment history is key to having a good credit rating. Whether that is on a secured or unsecured credit card really won’t matter.
Credit scoring models look at all aspects of your credit activity including your credit utilization rate. This is the amount you owe on a credit card compared to the available credit on that card.
It is a good idea to keep your credit balance low so that you don’t overstretch your finances. Most lenders advise not using more than 30% of your credit at a time if possible.
This will help to maintain your credit score but will show that you are using your credit responsibly.
Having a credit card, even a secured one can help to diversify your credit portfolio. You may have a personal or car loan but adding a credit card and managing it well can boost your credit rating.
This credit mix is important to show you can manage different types of credit.
Credit Cards That Can Hurt Your Credit
There are several ways that having a credit card can hurt your credit score.
If you regularly miss or make late payments this will have a negative impact on your credit rating. Any payments that are more than 30 days late are reported to the credit bureaus.
A high credit utilization rate can be detrimental to your credit profile. If your limit allows, try to keep usage under 30% and pay off the balance as soon as it is due.
You may think about getting an unsecured credit card at a zero or low interest rate to consolidate your debt.
This will depend on how good your credit score is but even if it’s good enough to get approved for such a card, applying for it could have a negative effect on your credit score.
This is because every time you apply for a credit card a hard credit check will be done on you. These always flag up with the credit bureaus and may be viewed negatively.
Also when you open a new account it lowers the average age of your credit history.
Final Thoughts
We hope this guide on what the difference between secured and unsecured credit cards are has been of help to you.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
- How To Start A Hot Shot Business [2023] - November 24, 2022
- Basic Personal Finance Concepts [2023] - November 22, 2022
- Where To Put Retirement Money After Retirement [2023] - November 4, 2022
