Understand How Secured vs Unsecured Credit Cards Work

Sun Dec 28, 2008, 12:42 pm | 1 Comment

There are two major types of credit cards – secured credit cards and unsecured credit cards. In either case, a regular monthly payment is expected. There are advantages to having either if you are careful to not miss a payment when it’s due.

Unsecured credit card

Most credit cards are unsecured. There is no collateral attached with this kind of credit card. If you cannot pay the bills, never ever, you file for bankruptcy. Once a settlement is reached, the card issuer cannot confiscate your home or car or your bank account.

Secured credit card

A secured credit card is a type of credit card “secured” by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired.

Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid.

Regular payment expected

The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit.

Advantage of the secured card

The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history.

Secured credit cards are available with both Visa and MasterCard logos on them. However, fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards for people in certain situations.

Home equity line of credit

Sometimes a credit card will be secured by the equity in the borrower’s home. This is called a home equity line of credit (HELOC). Unless you positively, absolutely need it, don’t go for it in case of credit cards.

Default

Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments.

Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency – generally 5 to 6 months.

Check cardholder agreement

Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.

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1. Understand How Credit Cards Work
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