The difference between a secured credit card and an unsecured credit card is that one is backed by money in the bank, and the other is not. A secured credit card refers to one that is guaranteed by funding. Generally speaking, this is linked directly to a savings account. Designed to protect the interests of the lender, the funds in the savings account can be accessed if the card holder does not pay the amount owed. This is different from having a joint card holder or a co-signer who backs the loan.
An unsecured credit card is not backed by any concrete funds. It is extended on the basis of good credit history and the lender’s belief that you have the desire and ability to repair the loan they extend to you. Both are methods of ensuring that the debt will be paid when the lender’s credit history is poor or lacking.
Why do people get unsecured credit cards?
There are several reasons that people choose to obtain secured credit cards. They may have a bad credit history or, in the case of a student or young person, a lack of credit history. A low FICO or credit score is also a very specific reason for using this type of credit management tool.
Here is how this type of card works. You decide how much money you want to put into the attached savings account, and that is the amount of credit that the lending bank or company will extend to you. For example, if you deposit $500 then you can spend up to $500 on your card. If you pay off the amount charged every month then your credit score will improve over time. If you don’t pay off the amount then it will be taken directly out of your attached account. Either way, the lender gets their money and your credit looks good. For many people, a secured credit card is a good first step towards learning how to manage finances responsibly and towards building good credit.
As mentioned earlier, you can also establish or re-establish credit by asking another person to co-sign your loan or credit card. In this situation, if you don’t pay the bank will go after the co-signer. Often, a parent will co-sign for a young adult. The risk here is that you could put that person in a very bad financial position if you are unable to pay off the debt. Most people know it is not a good idea to lend money to family members. Obtaining a secured credit card lets you take complete responsibility for your own finances.
Why do people get unsecured credits cards?
Most people get unsecured credit card simply because they can. Maybe you want to purchase a big ticket item or get rewards of some type. If you have a good credit score, there a number of providers eager to offer you their cards, along with a whole range of interest rates and other fees. Consumer experts recommend that you compare your options and read the fine print on any type of card before making a commitment.
Compare Secured and Unsecured Credit Cards
To decide whether a secured or unsecured card is right for you, just consider your credit history and money management skills. Then use the credit card chaser tool on our home page to track down those cards that will meet your needs. You can take that step to finding the best credit card right now!
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