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Secured vs. Unsecured Credit Cards
When used properly, secured credit cards are an effective way to establish a good credit rating or rebuild a bad one. However, some of the offers are deceptive and can end up costing a lot of money.
First, there is a big difference between a secured credit card and a regular one. With a secured card, you are required to open and maintain a savings account at the bank from which the card is issued. With unsecured you are not required to keep such an account. Your credit limit on this card is the amount of the money you deposit or a percentage of that amount.
The advantage of a secured card is that no one, except for you and the bank, knows that your credit card is secured. Also, most people will be approved because repayment is virtually assured and the risk is minimal. After a year or two of consistently making the payments on time, your account can be switched to an unsecured credit card and you get access to the money in your savings account again.
The disadvantage of a secured credit card is that, if you default on the balance of the credit card, the bank keeps the money in your account and the card is cancelled. Also, some issuers charge exorbitant application and processing fees. Most secured cards charge an annual fee and higher interest rates than regular credit cards. It is important to find out what these fees and interest rates are, and if the fees will be refunded if the application is declined.
- Some of the advertisements claim that they can get almost anyone approved for a credit card, but completely omit or gloss over the requirement of a deposit into a secured savings account. Usually any offer of "easy credit," regardless of your credit history, falls into the category of "too good to be true."
- Building a good credit rating takes time. There are no short cuts, even though a reputable secured card can be a valuable tool in getting there. Make sure the card issuer reports to the credit reporting bureaus. Otherwise, the card will do you no good.
