Skip to content Skip to sidebar Skip to footer

What Is a Secured Credit Card? How Is It Different From an Unsecured Card?

A cash deposit is required for a secured card. Since the deposit lowers the issuer's risk, these cards are a choice for people with bad credit.

A credit card is the easiest way to create good credit, but you can't get a credit card unless you have good credit.

Secured credit cards can help people with poor credit or limited credit records avoid this trap. What you need to know about protected cards and how they vary from standard "unsecured" cards is outlined below.

What is a secured credit card?

A secured credit card is one that is backed by a cash deposit made when the account is opened. Your credit limit is normally equal to your deposit, so if you deposit $200, your credit limit would be $200.

The deposit lowers the credit card issuer's risk: if you don't pay your bill, the issuer will deduct funds from your deposit. This is why people with poor credit or no credit will apply for these cards. 

What happens to your $200 deposit if you pay your bills on time every time? You'll get it back eventually. If you use the card wisely, you will be able to boost your credit enough to qualify for an unsecured credit card, which does not require a deposit.

Some of the best secured cards may allow you to upgrade your account to an unsecured card without any additional fees. Others don't allow you to upgrade, so you'll have to apply elsewhere and then close the protected card. The issuer returns your deposit when you renew or close a non-delinquent protected card.

The minimum and maximum amounts you can deposit vary by card, but for a secured card deposit, you should have at least $200 on hand.

Secured vs. unsecured cards

It all comes down to whether or not you need a protected passport.

Credit card companies usually need at least average credit for unsecured cards, which don't need a deposit and hence pose a higher risk to the issuer, and decent or outstanding credit for the better ones.

And if you have poor credit, some unsecured credit cards market themselves as easy to apply for. However, these cards normally come with exorbitant fees. Rather than a high-fee unsecured card, we suggest applying for a protected card.

How secured credit cards work

Secured cards work in the same way as unsecured cards until the initial deposit is paid:

You can use them anywhere that accepts credit cards, including online.

By safely using the card and paying your balance on time, you can create or restore your credit.

If you have a balance on your account, you will be charged interest.

The majority of major credit card companies have both secured and unsecured cards. Annual fees are normal, but they should never exceed $50. Among our favorite secured cards, there are some choices with no annual charge.

If you don't qualify for an unsecured visa, a secured card can be a useful tool for building credit. However, being careful for a secured card is just as critical as it is for any other loan or bill that appears on your credit report.

Secured credit cards vs. prepaid debit

Prepaid debit cards resemble secured credit cards in appearance. Before you can use the passport, you must first pay for it, and it usually bears the Visa, MasterCard, or American Express logo.

Prepaid debit cards, on the other hand, allow you to make transactions with your own money rather than money borrowed from the issuer. You load money onto the card, which is then used to pay for your transactions by the issuer.

Account activity isn't reported to the credit bureaus because these cards don't extend credit. As a result, using a prepaid card does not help you establish credit. Secured credit cards do not have fees, but prepaid debit cards do.

If you want to improve your credit, a secured credit card is the way to go.

How to use a secured card effectively

Secured credit cards, while requiring a deposit, are an effective tool for restoring credit. Here's how to make the most of one:

Use the card only once or twice a month, for one or two small transactions.

Every month, before the due date, pay off your entire balance. You will not be paid interest if you pay in full. Secured credit cards have higher interest rates than unsecured credit cards.

Keep an eye on your credit score over time, and when it has significantly improved, inquire about switching to an unsecured card with your issuer.

How fast does a secured card build credit?

Many people find that by wisely using a secured card, they can increase their credit score enough to apply for an unsecured card in less than a year. Some lenders would allow you to move from a secured to an unsecured line of credit, which is better for your credit score because it doesn't require you to open a new account.

Even if you do have to apply for a new unsecured credit card, you will be able to take advantage of some of the advantages of good credit, such as lower interest rates, rewards, and lower fees.

When the time comes, you'll be glad you spent the time restoring your credit with a protected credit card.

Post a Comment for "What Is a Secured Credit Card? How Is It Different From an Unsecured Card?"