The Differences Between Secured and Unsecured Credit Cards
The basic difference between the two types is that an unsecured credit card does not require you to put up a security payment, deposit or collateral of any sort. Your qualification is usually based on your financial history and status and the issuing company's determination of your ability and likelihood of making payments on time. The secured credit card does require a security deposit. This option is usually for people with imperfect credit histories or with credit and debt problems of substance. This generally means that secure cards can be expected to have relatively high interest rates. A few specifics:
The two most popular types are VISA ( The Largest ) and Mastercard. The former is a creation of the Bank of America while the latter is an evolution of a conglomerate of California Banks. Neither of these companies actually issues you a credit card. This is the province of the specific bank or financial institution you get your card from. As such, each bank sets its own rates, fees and payment policies. This produces a degree of variety in services, but there are a number of common features obtainable from most credit card issuers. See more on this topic below and at: Credit Card Advantages and Disadvantages.
Unsecured Credit Cards:
Most companies will issue these to credit worthy customers based on their credit history and earnings potential. VISA and Mastercard are the two most convenient since they are accepted at the most establishments. American Express is accepted at fewer places because of the rates at which they charge merchants for their services.
The requirements for qualification differs from company to company, and within companies, different types of cards may be offered based on a customer's financial details. It is common for companies to charge relatively high interest rates ( some percentage over the prime rate ) for customers without the most favorable qualities. A number of companies are now charging no annual fees for accounts and the use of this incentive is spreading. A common marketing feature is the low introductory annual percentage rate which a number of companies will offer new customers. Customers must understand that these rates have limited duration and it is adviseable to find out how long the introductory rates last until the fixed annual rate kicks in. This information is usually readily available from the issuing company's website or application package. Read the fine print.
Keeping up with your payments and understanding the duration of your payment grace period is also adviseable. The great risk of lax management is that late payments can initiate a number of punitive fees which can cause interest rates to skyrocket. It is therefore crucial that you pay attention to deadlines and keep track of your account figures.Credit limits differ based on the type of account. The best qualified candidates receive the highest limits.
Secured Credit Cards:
These require a deposit with the issuing bank. This amount, to secure a credit card, is usually only in the hundreds of dollars. It is held as collateral while the bank issues credit of some percentage of the deposited amount often 100%. In many cases, the card is reported to the credit bureaus as a normal (i.e. unsecured ) card. This allows the cardholder to establish a positive credit history over the duration. Based on good payment history over an extended duration, some banks will then issue the customer an unsecured VISA or MasterCard. Note that prepaid cards do not offer this benefit because they are technically not an offer of unsecured credit. We have more detailed information about the differences between these two in our article on Secured Vs Prepaid Cards