Differences Between Secured and Unsecured Credit Cards

It is difficult to navigate the world today as a consumer without some type of credit card.  Most businesses have an online component. It is difficult to take advantage of the convenience of the options available from online banking or holding a rental car without some form of credit card.  The credit card has become almost a necessity.  There are both benefits and risks associated with any credit card. Borrowing money costs money, in turn the cost to borrow changes with each credit card offer. The wrong choice in credit cards can mean the difference between a positive or negative credit report.  

All credit cards are not alike. In terms of traditional credit cards, the choice typically boils down to a secured or an unsecured card.  There are HUGE difference that separate secured credit cards and unsecured credit cards. Secured cards typically have lower risks for both card issuers and card holders associated with them than do unsecured cards. 

For those that have a less than desirable or lack of credit history, a secured card is an optimal choice.  These cards allow users to build credit by having a fixed spending amount which means low risk for the lender and the user. For those with a more solid credit history and earning potential an unsecured card may be a better option.

A secured credit card requires a deposit of cash to become the line of credit for the card, which then governs the terms of the spending, much like a checking account.  Secured cards may come with strings such as application fees or annual fees which will automatically be deducted from the line of credit deposit.  These heavy fees often times absorb the amount over time leaving the user with less spending power. It’s not uncommon for secured cards to come with a non-negotiable insurance policy.

Unsecured credit cards are more difficult to obtain because they not secured by the deposit of cash. Applicants will have to prove their ability to pay. The credit line is depending factors such as credit history, income and savings.  With an unsecured credit card a credit limit is set based on individual factors and granted based on the perceived ability for the consumer or applicant to pay off the debt they accrue with the card. These cards have higher spending limits which can lead to higher usage fees.  

Most financial institutions such as banks and credit unions offer both secured and unsecured cards.  It may be easier to qualify for a credit card as a member of a financial institution.  Because members have a status and history with the institution they are a lower risk.  Credit cards granted to members may come with enhanced benefits such as fee waiving or elimination of annual fees or even significantly low interest rates.  

Reading and understanding the fine print of any agreement is necessary to being an informed consumer.  There are risk issues surrounding credit cards both secured and unsecured.  These risks are one of the reasons for the legislation that will soon regulate some of the unprincipled practices that have been employed by credit card companies in the past.  This topic has been in the limelight in recent months. 

The introduction of the credit card legislation is set to be in effect in early 2010 may curb some of the practices around use and abuse that takes place in the credit card industry.  New legislation may limit the opportunity for some to get credit cards in the future.  Regardless of any legislation there is still a need to know and understand the user lender agreement when it comes to finances, including credit cards.  Secured or unsecured, any credit card agreement still has fine print and the contract is governed by the signature which indicates the user has fully read and agrees to the terms of the card.

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This entry was posted on Tuesday, October 27th, 2009 at 8:00 am and is filed under Debt & Consolidation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.