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Secured Versus Unsecured Credit Cards

The choice of obtaining a secured or unsecured credit card will probably not be yours to make. Be careful in either case.

What is the Difference?

A secured credit card is one in which the cardholder places an amount of cash in an account, to be used solely for purchases on an issued credit card. The credit limit of the card is usually the amount of cash on deposit. There are usually two reasons for this type of card:

  1. An individual does not like credit cards but realizes the necessity of having at least one in order to conduct normal business in our society. When writing a check, for example, most retailers will require two forms of identification – a drivers license (or state id card) and a credit card. As well, if an individual is considering purchasing items by telephone or on the Internet, the credit card can be used.
  2. Individuals whose credit has been severely compromised by consistently failing to pay obligations on time or who has declared bankruptcy, often cannot get a regular credit card. In order to build back a credit history, therefore, the individual can obtain a secured credit card, and the payment history will always show “paid on time, as agreed.” The credit score rises each month that purchases are made using the secured card.

An unsecured card is for those who have established at least a fair credit history and who have at least an average record of making the minimum payment on a card. This credit card is not backed by cash or collateral, only by the debtor’s promise to pay as promised. These cards have limits established by the issuer, based upon credit score, past credit history, income, home ownership, and a variety of other factors. Credit limits range from very small, to new credit card owners who have little or bad credit history, to huge amounts to creditworthy individuals who have been known to purchase very high ticket items and to pay for them completely as agreed. Huge credit limits go to individuals with credit score of 750 or higher.

Beware the Hidden Charges

If you are only eligible for a secured credit card, get one anyway in order to begin to build a good credit history. But watch for all of the fine print in these agreements. There are usually annual fees attached to these cards, and, in some instances, a monthly “service” or “insurance” fee. These fees can eat up your available money easily, and are charged because, unlike unsecured cards, there will not be as much interest taken in by the issuer. Fortunately, the government has been looking into predatory fee charging on secured cards, and there are already limits being imposed.

Additional Items To Investigate

If you are seeking a secured card, do your homework. First, make certain that the issuer will report your payments to all three credit bureaus. Remember, you are trying to establish or re-establish a good credit history.

How long must you go the “secured” route before the issuer will allow you to have an unsecured card? This is an important item in your decision
Can you choose to pay the entire balance of what you have charged in a month or do you have the option of paying a smaller amount over time, so long as you do not go over the cash amount deposited?

Will your cash deposit earn interest so long as it is not used to pay for purchases?

A general rule is this: If you are using a secured card to build your credit, keep it as long necessary to get a good to excellent score. Then, switch to an unsecured card. If you are using it because you simply do not like credit cards, keep it permanently.

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