May 12, 2015

Secured vs. Unsecured Credit Cards: What’s the Difference?

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Whether you’re new to the credit world or you’re rebuilding your score after a bankruptcy, it’s important to know the different types of credit cards available. Credit cards have a lot of terminology you may not be familiar with, and knowing these terms is essential to getting the best card for you.

Unsecured and secured credit cards perform the same core function. You get a revolving line of credit on your credit report from the cards. You can put purchases up to the credit limit on it, and as you pay off the balance you gain access to that amount of credit. The primary difference between a secured and unsecured card is the amount of collateral associated with the account.

An unsecured credit card does not require any collateral to back the credit line. The credit card company looks at your credit score, history, and other accounts to determine whether you qualify for the card. You are given a credit limit and interest rate based on your creditworthiness with the company. Unsecured credit cards often have incentives associated with using the card, such as:

  • Airline miles
  • Cash back
  • Point rewards
  • Promotional interest rate periods
  • Reduced or eliminated balance transfer fees

Unsecured credit cards are ideal if you have good credit and want to take advantage of lower interest rates, perks, and generally higher credit limits. Here’s a good list of the best unsecured credit cards.

A secured credit card does require some form of collateral associated with the account. Most credit card companies tie the credit limit of an unsecured card to the amount you deposit when opening the account. Secured credit cards have higher interest rates and may require monthly or annual fees to keep the account open. Some companies change secured cards to unsecured cards after you make on-time payments for a specific period.

Secured credit cards are intended for people who are post-bankruptcy or have bad credit. You don’t need a good credit score to qualify for the card, since you’re providing the credit card company with collateral to back the credit line. If you need a positive credit line to rebuild your credit score, a secured credit card is an accessible line of credit for the process. Here’s a good list of the best secured credit cards.

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