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Unlike regular credit cards, secured credit cards require a deposit to use. Typically the deposit you pay to use a secured credit card is equal to your credit limit, which means the lender takes on no risk—if you don’t pay your bill, they simply keep your deposit. On the other hand, regular credit cards are unsecured, meaning that the lender lets you borrow money without a deposit, expecting based on your credit history that you’ll pay them back later.
When you’re deciding between a secured and an unsecured credit card, it’s helpful to think about your own situation. If you’re just starting to build your credit or looking to rebuild your credit, a secured credit card could be a great option. On the other hand, unsecured credit cards typically provide higher credit limits and lower interest rates—some even provide rewards or cash back.
Secured credit cards | Unsecured credit cards | |
---|---|---|
Cash deposit | Required | Not required |
Credit limit | Lower. Usually equal to deposit | Higher, depending on credit score |
Interest rates | Higher, often more than 20 percent | Lower, depending on credit score (14–20 percent) |
Credit check | Often not required | Required. |
Fees | Usually | Generally only for rewards cards |
Helps to build credit | Yes, if the card issuer reports to credit bureaus | Yes |
Read on to learn how to distinguish secured vs. unsecured credit cards and how to choose the kind of credit card that’s well suited to your current credit situation.
Secured credit cards work similarly to traditional (unsecured) credit cards, but they require a deposit to use. Before using a secured credit card, you’ll need to provide a cash deposit that the lender keeps to back the credit they extend to you.
Just like any other credit card, you can use a secured card to pay for goods and services both in person and online. Your credit limit—or the maximum amount you can charge to the card—is usually equal to the cash deposit you provided. A typical deposit for a secured credit card may be anywhere from several hundred to several thousand dollars.
Because you can’t spend more than you’ve already paid to the lender, these kinds of cards are considered low risk, so they’re often suggested to people without credit history or who need to rebuild their credit score.
You’ll want to be sure to pay your bill each month for a secured credit card. If you neglect to pay your bill for several months, the lender will use your deposit to pay off what you owe—and they may close your account as well.
Secured credit cards can help your credit, but you’ll need to keep a few things in mind:
Knowing that a secured credit card can help you build credit, it’s important to think about the advantages and disadvantages of these cards before applying to get one.
Secured credit cards can be a useful tool, but they have some disadvantages as well. Consider all of the following when deciding whether a secured card is the right choice for you:
Pros
Cons
If you decide to get a secured credit card, you’ll likely want to upgrade to a regular credit card over time. After building your credit and learning how to manage your spending, a regular credit card offers advantages and flexibility.
A credit card enables you to pay for goods and services with money that you borrow from a lender. The lender will record all of the transactions you make with the card, and each month it will issue you a bill—you’ll need to pay at least part of this amount, but you’ll avoid interest charges if you pay the balance in full. You’ll be able to borrow money up to a predetermined amount, which is your credit limit.
Here are a few things to keep in mind about unsecured credit cards:
When you’re considering applying for an unsecured credit card, consider the advantages and disadvantages.
Unsecured credit cards—often simply called credit cards—can be very useful, but there are a few drawbacks to consider as well.
Pros
Cons
Despite the drawbacks, unsecured credit cards are generally a solid option if you have the credit score to get one and the habits to use it responsibly.
Since secured and unsecured credit cards both have distinct advantages and disadvantages, there is no single answer to which one is better. Instead, you’ll want to look at your needs and circumstances to decide which kind of card is best suited to you.
If you’re looking to build or rebuild your credit, or you want to learn responsible credit habits, a secured credit card may be the right choice. On the other hand, if you already have a solid credit history and you’re seeking higher spending limits or perks granted by a particular card, you’ll likely want to aim for an unsecured card.
No matter what kind of card you get, once you start using a credit card, you’ll want to get into the habit of regularly checking your credit report. Keep an eye out for any inaccurate information or fraudulent accounts.
As you build your credit score, these misleading negative items can be an unnecessary bump in the road. Fortunately, it is possible to repair your credit if you’ve noticed something incorrect on your report.
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