When choosing a credit card, it helps to understand the difference between secured credit cards and unsecured credit cards.
These credit cards are treated differently by the major credit bureaus, and they affect your wallet differently as well.
Secured Credit Cards
These are credit cards that require you to hold money, as collateral, in an account in order to use the card.
A secured credit card requires that you have some sort of “security” indicating that you will repay the loan. You are charged interest and fees on your purchases, and your payments are reported to at least one credit bureau.
However, the fact that the card is secured means that it isn’t as positive for your credit score.
A secured credit card is normally ideal for those who are trying to rebuild their credit.
If you have had credit problems in the past, you might not be able to get a loan without collateral — and this includes a credit card. A secured credit card will allow you to begin rebuilding your credit and showing that you are ready to adopt responsible behaviors.
It is important that you understand the difference between a secured credit card and a prepaid debit card.
The two can seem very similar, but a prepaid debit card is not a credit card, and your activity and payments won’t be reported to a credit bureau.
If you want to rebuild your credit, a prepaid card is useless; you need to make sure you get a secured credit card.
Unsecured Credit Cards
On the other hand, unsecured credit cards are those that don’t require collateral.
These are the “normal” credit cards that those with fair to excellent credit use. There is no money held in reserve to cover costs if the card balance isn’t paid.
If you have an unsecured credit card, you are considered to have a history that indicates that you are responsible with your money habits.
An unsecured credit card is weighted better in the credit scoring formula than a secured credit card.
This means that you are likely to have a slightly higher score if you have an unsecured card than if you have a secured credit card.
If you have a secured credit card, it is possible for you to switch to an unsecured card.
After six months to a year (depending on your credit and financial situation), your issuer might be willing to switch your secured card to an unsecured card — as long as you have been showing improvement in your credit history.
Even if your secured card isn’t converted to an unsecured card, you can apply for an unsecured card. If your good habits with the secured card have carried through, your credit score might have improved to the point that you will be approved for an unsecured credit card.
Know the difference between a secured credit card and an unsecured credit card.
Be aware that a secured card often comes with high fees and interest rates, and isn’t viewed favorably by credit scoring models. However, a secured card can be instrumental in helping you rebuild your credit. As soon as you can, switch to an unsecured card.