Secured Vs. Unsecured Credit

Before applying for a credit card you should consider many factors, such as annual percentage rate, credit lines and more.

One other factor to consider is whether the card is secured or unsecured. While both cards are used for the same purposes – to earn credit and purchase goods and services – the cards differ in the ways they are obtained and maintained. From the cost to the application process, you may find that one card serves your needs better than the other whether you have poor or outstanding credit. Read the sections below to discover how secured and unsecured credit cards function to make an informed decision on your next credit card.

Secured Credit

Secured credit refers to the security a cash deposit provides creditors. Consequently, secured credit cards can be expensive and may restrict some of your finance options such as cash advances. The amount of the cash deposit determines your credit limit and allows creditors to create accounts for individuals with lower or no credit, but you must consider the overall cost of the secured credit card prior to sending your deposit.

Most credit card lenders offer secured cards, so you can obtain your card at nearly any credit lender. Among the most popular secured credit providers are Discover and Visa. The creditors require you to submit your Social Security Number (SSN), bank account details and other information when applying for a secured credit card. If you are approved for the card, then you may collect the benefits associated with the secured card. The Discover it Secured Card, for instance, advertises benefits such as no annual fees, cash back on purchases at restaurants or gas stations and free SSN alerts. The Discover it card and some others also deliver upgrades to certain clients, depending on their credit management skills, that enable them to acquire unsecured credit from the same lender

While the required deposit for secured credit cards reduces the risks involved for the creditors, you may also experience less risks by using secured credit. For example, you will not instantly be sent to collections if you default on payments. Instead, creditors will use your cash deposit to cover your debts until they exceed your deposit. Additionally, you may earn interest on your deposit. Of course, the interest may be nominal, but you can still earn a few extra dollars while your deposit is being held. Finally, as you pay your monthly credit bills, you improve your credit and can eventually qualify for an unsecured card. After you close or update your secured credit account and settle any debt, you are refunded your cash deposit. Because you may seek a secured card due to your bad, or nonexistent, credit, rebuilding your credit is a great advantage secured cards provide.

Nevertheless, secured cards have their faults. Though the deposit can be viewed as a benefit, it ultimately makes the cards more expensive and limits your credit limit. Also, you often must pay application fees, processing fees and annual fees to maintain your secured credit, and high interest rates can make the credit significantly less attractive. You are advised to entertain multiple options for your secured credit card to ensure you find the most affordable one.

Unsecured Credit

As opposed to secured credit, unsecured credit cards do not require cash deposits. In other words, potential debt is not secured by any collateral. This type of credit card is the most common and demand higher credits as its main eligibility criteria. Because no assets can be repossessed in the event of defaulting on payments, strict penalties and increased interest rates may be imposed if default occurs.

Unsecured credit lines evaluate traditional factors when determining your eligibility for a card such as the following:

• Your credit history (i.e., your credit reports and score)
• If you have delinquent accounts (and how many)
• Whether you have hard inquiries on your credit report
• How frequently you have used previous credit cards
• Your income and debt

Once you are approved for an unsecured card, creditors must choose your maximum credit limit. While secured credit limits are predetermined by your deposit, unsecured limits are set by your credit lender. Your credit limit is dependent upon the following factors:

• The type of credit card: Some credit cards have fixed credit limits, and other credit cards may have set ranges for possible credit limits. It is unlikely that you will know a credit limit range before you are approved for a card, but you may estimate probable limits by reviewing average credit limits for specific types of credit cards.
• Your income: Because your income directly affects your ability to pay your bills, many creditors request your total annual or monthly income to measure your eligibility.
• Your credit history: If you have bad credit due to defaults or any other reason, creditors may be less inclined to approve you. How frequently you have made payments on past credit balances influences your likelihood of receiving a new credit card. Someone who makes late payments and faces penalties are signs that he or she may not be a reliable client.
• Your debt: Before applying for credit cards, it is wise to resolve as much of your debt as you can to improve your debt-to-income ratio. Expectedly, having a lot of debt makes credit lenders believe you cannot afford a credit card.
• Your previous credit limits: Credit lenders will often offer similar credit limits. If you have received high credit limits from lenders, then you will probably be offered a high credit limit in the future. Conversely, if you have consistently been given low credit limits, then you should not anticipate a high credit limit on upcoming credit cards.

Note: If you are jointly applying for an unsecured credit card with someone else, then creditors may assess both of your qualifications to determine your approval.

Which credit is best?

The type of credit that is best for you may change as your financial needs develop. However, it is a common belief that secured credit cards are better suited for individuals with money management issues or insufficient credit whereas unsecured cards are financial advisable for individuals with strong credit. Regardless, you are encouraged to explore both kinds of credit to find the one that is right for you.