How Does an Unsecured Credit Card Differed From a Secured Card?

Many people have had their credit ruined during this current economic downturn.

Credit card delinquencies are on the rise, and credit card companies are being much more choosy about who they do business with.

If you are lucky enough to get approved for a credit card, then there is a good chance that you are going to be saddled with enormous interest rates. I mean, credit card companies have to pay for the delinquent cardholders somehow right? (at least, that's their excuse).

So, we are left with a climate in which people with poor or no credit are either unable to get approved for a card, or else they simply can't afford the rates that are offered.

This has left these people to pursue a secured credit card, which is the topic of this article.

A secured credit card is when a credit card is secured by money that you send in beforehand.

Let's take an example.

You sign up for a secured credit card from XYZ.

They tell you that your limit will be whatever amount of money that you decide to secure the card with.

So, for instance, if you wanted a $5,000 credit limit, then you would need to send in a check or money order for $5,000.

Then, XYZ will issue you a credit card (Visa, Mastercard, whatever) with a limit of $5,000.

What happens to your $5,000?

The company puts it in an interest-bearing account. You earn the interest. If you decide to cancel the card, then you get your money back. The money is always yours - they are simply holding the money to secure the balance on your card.

If you walk away and decide not to pay your balance, then the company will simply keep the amount of the balance and send any leftover money back to you.

If you want to increase the limit on your card, then you simply send them more money.

A secured credit card works just like a normal credit card, and nobody will ever know that it is secured.

You can use it online, you can use it at a restaurant, you can use it at the movies.

Why would someone want to apply for a secured credit card? Here are a few reasons:

1. Pretty much everyone is accepted. Why? Because the card is secured, the issuing company has very little risk and can accept practically everyone.

2. Lower interest rates. Much lower. Many secured credit card companies are offering rates in the range of 7-9% - compare this to a traditional unsecured credit card.

3. People with poor or no credit can build their credit rating. You will build your credit rating with a secured credit card, regardless of whether or not it's secured.

The obvious downside to a secured credit card is that you have to front the money to obtain whatever balance you desire. However, if you are unable to obtain credit anywhere else due to a poor or non-existent credit rating, then building your credit with a secured card can prove to be a very wise option.

You can probably guess at this point as to what an unsecured credit card is.

An unsecured credit card doesn't require the holder to pay a balance up front. Rather, the size of their limit is determined by their credit-worthiness.

Because the card is unsecured, credit card companies can get away with charging more interest, as they are bearing more risk.

More on secured credit cards here.

Filed under: General Knowledge