Understand How Secured vs Unsecured Credit Cards Work
Wednesday, May 30, 2012, 2:00 AM | 2 Comments
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.
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Unsecured credit card
Most credit cards are unsecured. There is no collateral attached with this kind of credit card. When a time comes that you are unable to pay your bills for a few consecutive months, you file for bankruptcy.
Once a settlement is reached, the card issuer cannot confiscate your home or car or your bank account. For the lender, it’s unsecured loan. That may be the reason why the interest rate on credit cards is so high.
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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.
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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.
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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.
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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.
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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.
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Check cardholder agreement
Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.
In a Nutshell
Understand the difference between secured and unsecured loans before applying for either.
2 Responses to “Understand How Secured vs Unsecured Credit Cards Work”
By John on May 30, 2012, 3:13 pm | Reply
Isn’t a secured credit card much like a prepaid card? What’s the difference? Just wondering, thank you so much!
By Shafi on May 31, 2012, 3:22 am | Reply
There are distinct differences between the two. I am doing a post on June 2, 2012 showing these differences.