Secured and unsecured credit cards are two primary types of credit cards issued to customers with distinctive predefined terms of owing and using a card.
Taking it ahead, let us know what the primary criteria for both the cards are and the fundamental differences distinctively accepted as a choice of card for different categories of prospective and existing buyers.
First let us understand, what is a Secured Credit Card
A secured credit card is a card supported by a cash deposit that you make while opening the account. About 70% to 80% of the amount that you deposit becomes your credit limit for the complete tenure of your card usage. For example, if you deposit 300$, then you will have a credit limit of 300$ and that stays as a safe investment throughout the use of your card. If you make timely payments or if you upgrade your account for an unsecured card, you get the deposit back when you close the account and if you fail to make a payment, the credit card issuer extracts the due amount from your cash deposits.
The minimum and maximum deposit that you make while opening an account for secured credit card account vary from card to card. However, once you make the deposit the working of the card stays similar to a standard card providing you with the benefit of:
• Using the card at all online and offline stores wherever credit cards are accepted
• Using the card responsibly and wisely to ensure effective building or rebuilding of credit score
• Incurring interest on the due amount if in case you carry forward a balance
Let us now understand, what is an unsecured credit card
An unsecured credit card is a card supported by your own credit score and does not require any deposit. However, the issuer predefines the credit limit at the time of purchase based on your credit score, financial history and of course earning potential. The term itself defines that any collateral does not secure the card or any debt on the card. If you fail to make a payment, there is no deposit or property from where the issuer gets to extract the debt. It is undoubtedly a riskier proposition for credit card issuers, and you are liable to pay higher interest on debts and late payments.
The most important benefits of owning an unsecured card are:
• Paying lower fees
• Gaining higher reliability in the financial market
• Accessing higher credit limits
• Enjoying enormous benefits regarding bonuses, cash-backs, and rewards
• Getting to have flexible payment terms
Now, let us get to know the common features of secured and unsecured credit cards
Secured and unsecured credit cards have their own set of advantages and disadvantages that either compel or discourage a prospective buyer from purchasing a card. However, both the cards have some commonalities like:
• Both the types have annual fees. However, there are certain cards with 0$ yearly fees in both the categories.
• Build or rebuilt credit score using any of the two cards.
• For the usage of both the cards, the issuer reports the payment history to consumer credit bureaus.
Now, after having a clear understanding of the basics of secured and unsecured credit cards, let us streamline the fundamental differences between Secured Credit Card vs Unsecured Credit Card:
• The secured credit card has guarantee in terms of a cash deposit whereas unsecured credit card does not have any collateral.
• With the secured purchase, if you fail to make a payment, the issuer takes the due amount from your cash deposits whereas with unsecured purchase if you miss a payment, you accumulate interest on your balance.
• Secured credit card makes you to wise spending habits because you are aware that you have limited cash deposits whereas with an unsecured credit card you tend to go with unwise spending as you keep considering the credit card as your money and often make purchases beyond your earning capacity.
• Secured credit cards have a comparatively lower interest rate whereas unsecured ones have higher interest rates as this is how credit card companies earn their profits.
Now, to make a wise judgment of which card you should buy and what would be the benefits and risks of using the respective card; clearly and wisely think about your expenses, your monthly budget and your spending habits.