Wednesday 19th of December 2018

Secured vs. Unsecured Credit Cards

Credit cards are a way of life for millions of Americans and as such, they are an important part of the American culture and way of life. But there are many more (usually due to their age) who have not yet come into ownership of a credit card at all. When the time comes to consider the first card, there are naturally going to be questions about what type of product is best, what perks and rewards should be sought and whether the traditional unsecured card is the best option of if they will need to get started with the secured option in order to improve the rating.

The Unsecured Option

An unsecured credit card is a card that is offered by a lender based entirely upon the customer’s credit rating and score and their ability to repay. How much the card’s maximum limit will be is determined by the lending factors and the borrower’s income. The terms of the loan can include interest rates from as low as 0% (introductory) to as high as 35% or more. Unsecured cards are adjustable and their terms can be changed virtually at will by the lender offering the product. This means that interest rates can and often do rise or fall on a whim based on subjective terms set by the lender, the card may be even be cancelled or have its limit adjusted downward by the lender.

The advantages are that there is no upfront deposit required in order to open the account, the accounts tend to offer the best perks and rewards, and the higher limits that can be had with them. The disadvantages are the extreme risk to your credit rating of the card account is not handled properly, the high amount of power and authority over the account that the lender possesses, and the nearly endless number of fees that can be imposed by the lender on the borrower for the most minor of infractions.

The Secured Option

Secured credit cards are those that are backed by a customer-deposit into a bank account. The amount deposited into the account determines the borrowing maximum, though the maximum is not always a dollar for dollar limit. These types of products are often used to help rebuild a score after it has been significantly damaged such as by a bankruptcy or repossession that doesn’t allow the borrower to get an unsecured credit card based on their score alone.

The advantages include the ability to close and cancel the account at any time and receive back your deposit as savings minus any outstanding amount charged and not paid. In addition, secured products are often offered at very low interest rates to reflect the reduced risk that the lender is taking with the credit card (since they can always take the money out of the secured bank account if the owner defaults). The disadvantages are the high up-front costs, usually a minimum of $500 must be deposited to open an account, and the hard limit imposed by that deposit on your ability to get credit limit increases in the future.