Secured Credit Card Vs Unsecured Credit Card
Do you know that you can use secured credit card to build or rebuild your credit? I know that there are many credit cards out there. Customers are being bombarded with different credit card offers every day. Unfortunately, if they apply for some of these cards, their applications can be rejected. The fact that you receive a credit card offer does not guaranty automatic approval if you apply. To make things worse, every time you apply for a new credit card, an investigation will still be conducted on your credit. Such investigation usually constitutes a hard inquiry which is capable of lowering your credit score by few points. So, if you say you will keep trying until you are able to have your application approved, you may not be doing your credit any good at all. Incessant credit card applications can send a red flag to credit card companies or lenders that you may be under financial pressure. Until you do the right thing or take the right step, all your attempts to get a new credit card may be in futility. It doesn’t matter how many time you apply for a card, if you keep applying for a credit card you are not qualified for, it will still not yield any positive result. For instance, if you have a bad credit, it may be difficult for you to get regular credit cards. Apart from regular credit cards, there are still other types of cards which one can use to make purchases. These include debit card, prepaid card and secured credit cards. There are regular credit cards which are also being referred to as unsecured credit cards. Let me throw more lights on these cards.
Debit card is usually linked to checking account. Each time you use debit card to make purchase, you are spending your own money. Therefore, you can only use the card to pay to the maximum of the amount you have in your account. Transactions on debit cards are cash transactions. For this reason, your payments are not reported to any credit bureau. Therefore, you cannot use debit card to build your credit. Besides, you may not be able to use debit cards for certain transactions. For examples, you may be required to pay with credit card for airline tickets, car rental and hotel books.
Read Also: Debit Card Vs Credit Card. Which is better?
Prepaid cards work just like debit cards. The only difference is that your card is not linked to your checking account. You need to load the card with the amount you desire. That means you don’t need to have a checking account with the bank before you can be issued a prepaid card. Also, any transactions made with prepaid cards will not be reported to credit bureaus. Some airlines, hotels and car rental agencies may not accept prepaid cards as a means of payment.
Unsecured Credit Cards
These are the regular credit cards that people are familiar with. It is called unsecured credit card because you are not required to deposit any security amount as collateral before you can be issued the card. If you are granted unsecured credit card, the implication is that the card issuer has given you permission to spend their money up to an approved credit limit with the promise that you will pay back the money. The credit card issuer will like to investigate your credit history before you can be issued an unsecured credit card. If you have a good credit history and good credit score, there is tendency that your application for unsecured credit card will be granted. This can also help you enjoy low interest rate. On the other hand, if you have short or no credit history, you may not be able to get unsecured credit card. Also, if you have bad credit, your application may be declined. All the transactions made with unsecured credit cards are reported to credit bureaus.
Secured Credit Cards
You must have been told on how important it is to have credit history. The challenge is; how can you have a credit history if the transactions you make with debit cards and prepaid cards are not reported to credit agencies? On the other hand, you cannot get unsecured credit card on a platter of gold. If you don’t have credit history or good credit score, no credit card company will issue you a card. And you can’t build credit without having a credit. So, what is the way out? If you find yourself in this situation, the solution to your dilemma may be to apply for a secured credit card. What is a secured credit card? How does secured credit card work? What are the benefits of secured credit card? These are the questions I shall address below:
What is a secured credit card?
Secured credit card is the type of credit card where you will be required to pay a certain amount as security deposit before the card can be issued to you. This security amount will serve as collateral. If you are issued a secured credit card, you can use it the same way you will use your regular credit card. It works the same way as unsecured credit cards. The only difference is the security amount you need to deposit before you can be issued a secured credit card. The security amount you deposit will determine the credit limit you will be granted on the card. You are expected to pay your card balance the same way you will do with unsecured credit card. Even though you may not make full payment, you are expected to make minimum payment. You can’t use your security deposit to pay for your purchase. The amount is normally paid into a separate account. It may yield interest or it may yield no interest. In case of any default, your deposit will be used to pay off the balance. But if your card balance is less than the amount you deposited, the balance will be refunded to you. Each credit card company has its own terms and conditions as to whether to pay interest on security deposit for their secured credit cards.
Why secured credit card?
It has been noted that some class of people may not qualify for regular credit cards. However, they still need credit card to build their credit and to be able to pay for transactions that require that payments are made with credit cards. So, secured credit card is there to bridge this gap. Specifically, secured credit card will be useful for the categories of people below:
- People with short or no credit history: If you have never used a credit card before, you may not have any credit history. Credit history is a major requirement you need to meet if you desire to apply for a credit card. If you just attain the age of 18 years or you are the type that believes you may not need a credit card, it doesn’t matter how long you have been using debit cards, there is no way you can have credit history. So, secured credit card gives you that opportunity to start building your credit history. Please note that it is not enough to hold a secured credit card, you need to be using it. It is not how long you have been carrying a credit card that is important, credit bureaus like to see how you have been using it. This will allow them to determine whether you can manage your credit effectively.
- People that like to build their credit: How is your credit like? It is possible you are planning to apply for loans or shop for insurance. If your credit is not good enough, you may like to build your credit first so that you can enjoy favourable rates. The trick is that, you don’t wait till the time you need the loan or insurance before you start taking steps towards building your credit. You can start building your credit by ensuring that you use your secured credit card responsibly. Use the card to buy small items and ensure you pay off the card balance at the end of each month. It is not advisable to carry any balance if your objective is to build your credit. Minimum payment may not be sufficient in this case. You should also ensure you don’t fall behind in making your monthly payment. Late payments may aggravate your credit.
- People with no financial strength: If your debt-income ratio is already high and you are unable to increase your income, you will definitely find it difficult to get a new regular credit card. If you feel that you need additional credit card, a secured credit card may be a good alternative
- Foreigners: If you are a foreigner from another country, it may be difficult for you to get an unsecured credit card. Even if you have a debit card or prepaid card, there are some payments you will not be able to make. Airlines, hotels and car rental agencies usually prefer their customers to pay with their credit cards.
How to shop for secured credit card
There are different secured credit card offers in the market. If you don’t shop around, you may think that you have landed the best secured credit card deal while you may be paying too much without knowing. Since you already know the type of the credit card you are looking for, it won’t be difficult for you to make comparison. Just as a guide, the following are some of the factors you may need to consider before you settle for a particular secured credit card.
- Fees: Generally, there are many fees that secured credit cards may attract which you may not need to pay when applying for regular credit card. Some fees you may come across while shopping for secured credit card include application fee, annual fee, processing fee and credit limit increase fee. If you shop very well, you will find some card companies that will not charge all the fees mention here. Also, the amount of each fee will vary. You should ensure that you are not paying too much fee on your card.
- Security deposit: You need to consider both the minimum and maximum amount you can pay as security deposit. Since your main objective for the secured credit card is just to enable you build your credit, you should be able to choose a card issuer that offers a good minimum security deposit so that you don’t tie down your money unnecessarily. Find out if your deposit will yield interest or not.
- Credit limit: In most cases, your credit limit will be the same amount you paid as a security deposit. That is, if you paid $800 as security deposit, then your credit limit will be the same $800. However, there are few credit card companies which will set your credit limit above what you deposited. Whatever the case, it is not advisable to max out your credit. If you will like to increase your credit limit, a good secured credit card should give room for the opportunity without the need to pay credit limit increase fee.
- Interest rate: The APR for secured credit cards is unusually very high. But still, the credit card companies don’t offer the same apr on their cards. However, if you don’t intend to carry balance on your card, the interest rate may not be a major factor to consider. Secured credit cards work the same way with unsecured credit cards. If you don’t carry balance on the card, you will not need to pay interest on your purchase. But if you use the card to make cash withdrawal, you will need to pay interest on the amount withdrawn in addition to the cash withdrawal fee which you will be charged. The best thing is to avoid using the card to make withdrawal. If you happen to use the card to withdraw cash, it is important that you pay off the amount as soon as possible. This will limit the amount you need to pay as interest.
- Grace period: You should not assume the grace period of twenty one days after the statement date before you can make payment. When it comes to secured credit cards, the terms may be slightly different. Any card that offers too short grace period may not help your cash flow.
- Will your transactions be reported to credit bureaus? If the answer is no, I will suggest that you run away from such secured credit card no matter how attractive other features it may have. I believe you are looking for a card that will help you build or rebuild your credit. How will you be able to achieve this objective if your payments are not reported to the credit bureaus? What advantage will a secured credit card have over debit cards or prepaid cards if payments are not reported to credit bureaus? This is a crucial feature you cannot afford to miss in any secured credit card. If you are not clear about this, you need to ask specifically.
- Will you have the option of converting the card to unsecured credit card? If you use your card responsibly, some card companies may convert your secured credit card to unsecured credit card after some months. If they review your account and realise that you have been paying your balance without any delay, the card can be converted to unsecured credit card. This means that they will refund you your security deposit. If the cash issuer is not forthcoming on this, you can specifically ask that your card is converted. In case the card company declines, you can apply for a new regular credit card elsewhere. If you have succeeded in building your credit to certain level, your application may be granted. In conclusion, you should not allow any card company to lure you into buying their product. You should do your own background checks. Find out if their claims about the product and their services are genuine. If a card company promises to convert your secured credit card to unsecured credit card over a period of time, it may make sense to find out how many customers have enjoyed this before. What are the customers’ comments? If many of them are saying the same things, definitely they can’t be wrong.