Five thousand years ago, ancient Mesopotamians used valueless clay tablets to represent currency when trading.
Today, we use credit cards.
In fact, you can access hundreds of credit cards in two categories–secured and unsecured.
Each type of card offers benefits and includes drawbacks. To decide which type of credit card is right for you, you must understand the difference between secured vs. unsecured credit cards.
Credit cards, banks, and other financial institutions that issue credit cards expect you to repay your debt.
However, unlike with a home mortgage or a vehicle loan, they often have nothing to repossess if you fail to pay your bill.
That’s why some lenders will offer secured credit cards if you have bad credit or no credit until you build up your credit history.
With a secured credit card, you deposit a refundable amount of money with the issuing lender. The amount you deposit could be equal to your credit card account’s credit limit or up to 200% more. Your credit limit can range from $200 to $3,000 depending on your credit history and the lender.
Despite the security deposit, you are still responsible for making regular payments to your account. The security deposit serves only as an insurance policy for the lending institution. If you miss a payment, the issuing credit union or bank can withdraw the amount due from your security deposit.
If you have a good credit history, you can apply for the more common type of credit card, an unsecured card. Unsecured credit cards require no upfront security deposit.
Individual lending agencies establish the credit limit and interest rate for unsecured credit cards. The criteria that determine your credit limit includes your credit score, debt-to-income ratio, payment history, and the number of credit cards or other credit accounts you have open. In general, your credit limit will be higher if you have excellent credit.
As with a secured credit card, you’ll need to make timely payments on your unsecured credit card. Review your monthly statement to find details about the charges, balance, applicable interest charges, and due date.
Here are some of the most significant differences between secured and unsecured credit cards.
Security Deposit: Secured credit cards require you to make a security deposit to qualify, while an unsecured credit card does not
Credit Limit: Secured credit cards offer a lower credit limit. In contrast, an unsecured credit card can range from a low credit limit to a $20,000+ limit or unlimited spending amount.
Approval: Since a security deposit is required for a secured credit card, they are much easier to qualify for than an unsecured credit card. That’s why it’s a great option if you have no credit or looking to improve your credit score.
Secured and unsecured cards have some things in common as well.
Make Purchases: Both secured and unsecured credit cards allow you to make purchases online and in person.
Payment: You will need to make monthly payments on your credit cards to keep your account in good standing.
Impact Your Credit Score: How you use your credit card will impact your credit score.
Fees: Issuers for both types of cards can choose to charge fees such as annual fees, late fees, other others, based on how you use your card.
There are benefits to using a secured and an unsecured credit card.
While they both allow you to make purchases and improve your credit score if used right, the primary benefit that the secured credit card has that unsecured doesn’t is that if you have a lower credit score or no credit, you can use it to build your credit.
Since a security deposit backs it, you can get approved in most situations despite your credit score.
Over time, when you build your payment history, you might convert your secured card to unsecured or apply for a new card.
Making the right decision for you will depend upon your current financial status and your goals.
Here are five steps you can take to help you make a decision.
Your credit will determine if you qualify for an unsecured credit card or if you must start with a secured credit card and build your credit history from there.
Whether you opt for a secured or unsecured credit card, it’s important to use it responsibly. Make the wrong move, and you can negatively impact your credit, but make the right choices, and you can set yourself up for success with a good credit score and positive spending habits.
Learn more about using a credit card wisely with this article on first credit card tips.