Considering to apply for your first credit card, or maybe you’re trying to rebuild your credit history. Whatever might be the reason, you’re most likely to stumble upon the terms, secured and unsecured credit cards. Before availing a credit card, it’s pivotal to understand the basic difference between the two terms. Each card caters to the needs of different individuals, poses different risks and benefits to the cardholders. You can too forge a meaningful and fruitful relationship with your credit card, by simply understanding the fundamentals. Like knowing about the types of credit cards, their basic usage, working principles etc. All such things will help you become wiser in using a credit card.
Read on to know more about secured and unsecured credit cards, and decide which one suits you better.
What is a secured credit card?
It’s a type of credit card provided against an asset, which could be fixed deposit or any other savings. In a nutshell, a secured credit card is backed by some collateral that needs to be submitted to the respective bank or financial institution before availing. Such credit cards are most suitable for people without a good credit score. These credit cards help an individual in building a good credit score and helps them to get easy approvals on a regular credit card. In case of a default, the bank can liquidate the fixed deposit accounts or the asset submitted to recover the lost amount.
If the person has a good repayment history, then the bank often increases the credit limit of that person, and this increased credit limit also adds up to the credit score. A cardholder cannot close the fixed deposit account until the secured card is in her/his possession. In case of non-payment, the asset is forfeited to the bank. The borrowers with bad credit history and scores are generally asked to pay-off collateral, as they are seen as risky investments.
How do secured credit cards work?
The working principle of these cards is rather elementary. When applying for the credit card, the bank will take your fixed deposit accounts as collateral to make sure you don’t miss out on any payment. In case you default on your payments, the lenders will draw the amount from your fixed deposits. This also reduces the risk of falling into the debt with a credit card. If you keep up with your timely payments, then your credit score will have some positive remarks on its side.
Pros of a secured credit card
Helps to build a credit score
If you make payments duly and in a timely manner then your credit score will see an increase over time. It’s a great way for a new credit card user to make smart choices and strengthen their credit score. By choosing a secured card, a person can increase its credit score with wise usage and pay bills on time.
Helps in building a credit history
Banks generally consider a person’s credit history before availing a credit card or a loan. With the help of a secured credit card, an individual can build up a credit history.
Increase credit limit and also earn interest
You can earn interest on your deposits. The credit card opted against fixed deposits doesn’t have any other charge except for the payment fee. The credit limit of the cardholder can be increased while also earning interest on the fixed deposit account.
Faster approval
The approval process is smoother and faster, as the banks are already risk-free by accepting security from the borrowers.
Cons of a secured credit card
- -You have to provide banks with some collateral before availing the credit card. And if you’re unable to pay-off the amount to the bank, then the bank can draw that amount from your fixed deposits. The assets are forfeited to banks in case of non-payments.
- -There are some additional processing fee and annual fee levied on a secured credit card. This increases the cost of having the card. You might incur some auxiliary expenses on your secured credit card.
What is an unsecured credit card?
Most credit cards offered by the lenders or financial institutions are unsecured. Simply put, it is a card which can be availed without any collateral. Instead of asking for the collateral up-front, banks charge an interest rate on the purchases made by the customers through the card. You don’t need to have a fixed deposit account with the bank or give any collateral. Customers qualify for an unsecured credit card based on their credit history, financial strength, and earnings potential. An unsecured credit card offers lower-interest rates, extra benefits and better rewards than a secured credit card.
How do unsecured credit cards work?
No collateral is required to avail an unsecured credit card. The terms of debt are based on factor’s like borrower’s credit score, ability to pay back in full and other factors. Since the debt is unsecured, such type of cards are slightly riskier on part of the lenders. In case of default or non-payment, the charges keep on compounding.
An unsecured card comes with hoards of benefits and reward points. Lenders or any other financial institution often provides lower fees, higher credit limit, since, they seem to be more reliable.
Pros of an unsecured credit card
Better rewards
An unsecured credit card offers better rewards and benefits on your purchases. You can avail several offers like cashback, reward points and many other benefits.
No security deposit is required
Unlike secured credit cards, you don’t need to put anything as collateral. Banks or financial institutions won’t ask you to put something up as a security.
Cards typically come with lower interest rates
The interest rate offered on such cards is typically lower. Secured credit cards generally have a higher interest rate, because the borrowers are considered as a risky investment.
Cons of an unsecured credit card
- It can affect your credit score if the balances are not paid in a timely manner. The compounding plays its part when and if the amounts are not paid.
- You might need a good credit score. Lenders or other financial institutions might ensure if a person has a good credit score before availing the card. Check your credit score before availing an unsecured credit card. Financial institutions generally consider a score above 750 as a good score.
Secured vs Unsecured credit card- Which credit card is the best for you
Both secured and unsecured credit cards have their own pros and cons, the choice completely depends on your finances and spending habits. They pose different benefits and risks. Both secured and unsecured credit cards help in building up a good credit score if used wisely and responsibly over time.
If you aren’t a first-time credit card user and have had past experiences in using a credit card, then an unsecured credit card might be the better option for you. These cards have more benefits over a secured credit card and offer reward points and other benefits on your purchases. Just make sure to make regular and timely payments and your credit score will improve over time.
If you’re a first-time borrower or want to alter your credit score then a secured credit card is the better option for you. Use secured credit cards wisely to improve your credit score. Make a small number of purchases every month and pay them duly on time. A secured credit card is mostly used for building or improving the credit score, and thus you won’t find any other extra benefits or rewards on such cards.
Bottom Line
Before applying for a credit card, always carry an in-depth research and choose what’s best for your needs. When looking to choose a credit card between an unsecured and a secured one, always choose according to your financial needs and objectives. You can also check your credit report for free before applying for a credit card.
