What Is the Difference between Secured and Unsecured Credit Cards

Credit cards come in different types. There are secured and unsecured credit cards. But what is the difference between secured and unsecured credit cards? I will dwell on this later to help you understand between the two cards and know how you can utilize them for your line of credit needs. Credit cards are essential tools to help you build your credit scores to stand a better chance to qualify for gig loans.

People take credit cards for various needs. Some apply for credit cards to build their credit scores, while others help finance their everyday needs when they fall short of funds. Not all the time will one have sufficient money to cater to their needs. Sometimes your salary or any other source of income may delay, thus being forced to borrow with your credit card.

Credit cards allow you to borrow money instantly. You do not have to fill in details on an application form to get a loan. You only need to use your credit card to get the funds needed for your transaction needs. Remember that credit card lines are loans, and once you borrow, you have to return the amount borrowed at the end of the month with interest.

How do credit cards work?

It is crucial to understand how credit cards work to handle them once you get one. The operation of a credit card is straightforward as there is no hidden business in them. Once you get the card, you have to activate it to start using it.

Credit card issuers consider your credit scores or amount of deposit to give you a credit limit. The more your credit scores or deposits, the more your credit limit and vice versa. A credit limit refers to the maximum amount of money that you can borrow with your credit card. Once you exploit the credit limit, then there is no way you can borrow again until you pay off your debt.

Since credit cards allow you to borrow from your credit card issuer, you must return the amount of money borrowed with some interest. Again, the more you utilize your credit allowance, the more you attract bigger interest and vice versa. For your information, using too much of your line of credit harms your overall credit scores. Financial experts recommend that you use at most 30% of your credit limit to be on the safe side.

Payment of credit card bill should be on the exact day. If you delay too much, the credit card issuer may charge you a late payment fee that adds additional debt to your existing loan. Remember that if you misbehave with a particular credit card issuer, your information will be available with your credit bureaus.

Credit bureaus are bodies entrusted by the government to keep credit records of borrowers in the US. When you start using a credit card and loans, the concerned financial institution reports your credit card usage or loan payment to credit bureaus. That means your payment behavior will be available to all other loan and credit card issuers.

What are the requirements to get a credit card?

difference between secured and unsecured credit cards

There are things that you should meet to get a credit card. First of all, you must be at least 18 years old. There is no way someone under 18 can be able to pay a loan. Above all, you must open a checking account with the concerned bank or credit union. To open a bank or credit union account, you will need things like;

  • Social Security Number (SSN)
  • Your identification document. It can be your driver’s license, your passport, or your government identity document.
  • An email address
  • Physical address’ and
  • Phone number.

Some financial companies may have some additional requirements that you must meet to open an account with them. Once you open a credit card account, you can then apply for the card. You require credit scores or a certain deposit amount.

First, you can check your credit score to know which credit cards to pick or apply for and let your bank or credit union decide which credit card fits you. Interestingly, you can get approved for a credit card with no credit at some institutions once you pay the required security deposit.

What is the difference between secured and unsecured credit cards?

Remember, I highlighted earlier that there are two main types of credit cards. These include secured and unsecured credit cards. Now the big question is, how different are they?

Secured and unsecured credit cards are different in the following ways.

  • The Secured credit cards do not require any credit history, while unsecured credit cards require some credit history.
  • Secured credit cards require you to deposit some amount in your account to act as security. Unsecured credit cards do not need any security deposit when applying.
  • You can get as much limit as possible for secured credit cards depending on your security deposit amount. Unsecured credit cards dictate your credit limit depending on your credit scores.

Despite the differences, both secured and unsecured credit cards allow you to grow your credit scores over time. For secured credit cards, you can graduate to unsecured credit cards when you get adequate credit scores. Again, both credit cards attract interest on the amount borrowed and require you to pay your debt at the end of the year.

How do I grow credit scores with a credit card?

There are various ways you can increase your credit scores. They include the following.

i) Utilizing your credit limit up to 30%

You should make sure that you do not use too much of your credit limit. As I mentioned somewhere up, financial experts suggest credit utilization of 30% or below to grow your credit scores. If you use too much of your credit limit, you prove that you are a bit irresponsible, and you may not repay your credit card debt as expected.

ii) Pay your debt on time

When you pay your debt on the agreed date, you create a good reputation with your credit card issuer. Paying on time has a positive impact on your overall credit scores. You also need to note that your payment history contributes a lot to your overall credit scores.

iii) Keep your credit card active

Dormant credit cards lower your credit scores. You should ensure that you keep your credit card active. Again, if you do not utilize your credit card, you may end up paying an inactivity fee that adds an extra burden to your existing debt.

Are secured credit cards a good idea?

If you do not have any credit history, secured credit cards are the best alternative to build your credit scores. But how long does it take to build credit with a secured credit card? Anyone applying for a secured credit card to build their credit scores would wish to know how long it will take to grow their credit scores.

Well, according to the FICO scoring model, you can build a credit score after six months of reported payment history. However, it takes 30-45 days for the secured credit card usage to be reported. The bureaus then begin combining various pieces of information from your credit card issuer. The number of scores accumulated over time can change from one person to the other depending on their credit utilization behavior.

How do you know your credit scores?

There are various ways you can know your credit scores. First of all, you can know your credit scores for free from your credit issuer. If you have a credit card account online, you can always check your credit scores from your card issuer for free. Credit Karma also issues free credit scores that they get from TransUnion and Equifax. 

Alternatively, you can buy credit scores from any of the three credit bureaus: Experian, Equifax, and TransUnion. The three credit bureaus also provide a free credit report to every credit card and loan user once per year.

Do credit reports contain credit scores?

Credit reports do not contain credit scores whatsoever. You can obtain credit scores separately from the credit bureaus. I indicated that if you want your credit scores from your credit card issuer, you have to purchase them.

In your credit report, you can find various details such as your name, your physical address, the loans borrowed plus the date you borrowed, your repayment patterns, among other details. You can always compare your credit reports to see if there is an error.

How do I dispute errors in a credit report?

You can always complain to have things put in order when you find any error in your credit report. Sometimes you might find your name wrongly spelled or your physical address poorly written. You might also find some accounts in your credit report that you never opened. In such a scenario, you should dispute identity theft.

To dispute any error, you have to open an account online with any of the credit bureaus and then point out the mistakes in your report to have them solved.

Bottom line

There are two main types of credit cards. We have secured credit cards and unsecured credit cards. Secured credit cards require you to deposit some amount of money in your bank account to get them, while unsecured credit cards only require you to have specific scores to have them. Credit scores are not contained in your credit report. You can get your credit scores online from your credit card issuer and Credit Karma for free or purchase them from the credit bureaus.