When choosing a credit card, there are generally two options to consider – unsecured or secured credit cards. Each option has its own advantages and disadvantages that depend on your financial situation and needs. So, should you get a secured or unsecured credit card? Selecting the appropriate card can assist in improving your credit, earning rewards, and reaching your financial goals.
Understanding the Difference
A secured credit card requires a refundable security deposit upfront in order to obtain a line of credit, making it accessible for individuals with poor credit. On the other hand, unsecured cards do not require an upfront deposit and instead, evaluate your eligibility solely based on your creditworthiness.
When deciding between a secured or an unsecured card, consider your current financial situation and the benefits you need from the card before selecting one option over another.
Advantages and disadvantages of secured cards.
Secured cards are helpful for people with limited credit history or a low score. Having been in the lending profession for many years, I’ve come across a lot of people who don’t think they can get a credit card because of bankruptcy, or they had a car repossessed or they have collections or a tax lien.
They don’t understand that the primary purpose of a secured credit card is to help them rebuild their credit after any of these credit events. By selecting a secured credit card, we’re removing the risk of default from the lender because you are making a deposit into the bank’s account equal to the limit set on the secured credit card.
The upfront deposit acts as collateral, allowing those with bad credit or no credit to qualify and start building or rebuilding credit. However, as you might suspect, secured cards usually have higher fees, lower limits, and fewer perks compared to unsecured options. But, that’s the price you pay for building or rebuilding your credit. Additionally, you won’t receive your deposit back until you close the account.
How Many Secured Cards Should You Have?
If you’re looking to build credit for the first time or rebuild your credit, I’d recommend that you get three (3) secured credit cards. Over the past 40 years, I’ve reviewed thousands of credit reports. I’ve found that three credit cards yield the highest credit scores.
If you can afford it, I’d also recommend that you start your secured credit cards at $500 each. Of course, this means that you’ll need a security deposit of $500 in each of the three banks. Use the cards at least once every month and make payments on time. Or, even better, pay them off before the next payment is due. If you continue to do this, after roughly 6 months, you may see that these lenders will increase your credit line to $750 without requiring you to deposit additional funds.
Why You Should Request Credit Limit Increases
After a few more months of using your cards and making timely payments, you’ll start to see regular credit increases. If one of your banks doesn’t increase your limit, make a request that they do. If your goal is to build a solid credit score in the upper 700 to 800 range, then you should be continually accepting the bank’s offer to increase the limit (or request a limit increase).
I’m saying this because I’ve had numerous clients who tell me they don’t want anything more than a $500 limit because they are afraid of getting into debt. While I understand their concern, if they truly want a high credit score, they need to prove to the credit bureau that they know how to manage their finances. This is similar to taking on new challenges at work in order to be recognized as someone worthy of a promotion.
Advantages and disadvantages of unsecured credit cards.
Unsecured cards don’t need a deposit, so your credit limit is determined by your qualifications, which includes a credit check through the major credit bureaus. Unsecured credit cards often have higher spending limits than secured cards. Approval criteria are stricter, but interest rates and fees are usually lower. Unsecured cards also offer better rewards and cash-back options.
For example, some issuers offer introductory 0% APR periods or even sign-up bonuses which can be used to earn extra cash back or discounts on purchases. Unsecured cards often don’t have annual fees (unless they offer significant perks such as flight miles) so you can avoid incurring additional costs while still taking advantage of the benefits offered by the card.
Just as a person with a secured credit card can gradually earn the privilege of having unsecured credit cards, those of us who already have unsecured credit cards can take this to another level of perks. For years, I ran a portion of my business through cards that would earn me cash back or flight miles. I thought I was doing pretty good getting 3 to 5 free flights per year until I met someone who had earned over $40,000 in cash back from his credit cards the previous year.
As tempting as these perks are, remember that the reason these credit card issuers offer them is that many people will eventually carry over a balance from month to month. So, you need to stay focused. Have a plan in place where you will pay off your cards on a certain day every month. Better yet, if you can afford it, set up your credit card with an automatic payment each month that pays off the balance.
Choosing the Right Type of Credit Card
When deciding between secured and unsecured cards, consider your credit history, income, and goals. If you want to build credit, a secured card can help establish a responsible usage history. If you already have excellent credit, an unsecured card offers higher limits and rewards. Set clear goals, such as improving your score within 12 months or earning bonus miles for a vacation.
Key Factors to Compare
When assessing cards, consider the following factors:
- Annual fees
- Interest rates
- Credit limits
- Rewards programs
- Reporting to credit bureaus
How to Apply
To apply for a secured card, select a lender and provide the required security deposit amount. It is important to be ready to provide personal information and documentation to verify income.
When applying for an unsecured card, it is necessary to provide an application that includes information about your income, employment, and credit profile. The lender will then use this information to determine your approval based on your creditworthiness, which means that they will pull your credit history.
Conclusion
Secured and unsecured credit cards have different advantages and disadvantages. It is important to consider your financial situation and choose the type of card that aligns with your goals, such as rebuilding credit, accessing higher limits, or earning rewards. When used responsibly, credit cards can positively impact your financial standing.
