The Difference Between Secured and Unsecured Credit Cards

• The majority of credit cards issued today are unsecured. That means there is no collateral backing the money you are borrowing each time you charge a purchase. For this reason, credit card issuers must be confident that you are a good credit risk before providing an account for you. Secured credit cards are different because they do require collateral in the form of a savings account. You deposit a specific amount of money into the savings account, and the lender extends credit for either that amount or slightly over that amount. For example, if you deposited $250, you could expect a credit line of $250 to $500.
  
  

Making Purchases and Payments With Secured Credit Cards

• A secured credit card does not look or function differently than any other credit card. You can use them anywhere you would use an unsecured credit card, and you can make any purchase as long as you do not exceed your credit limit. Because these are credit cards, you will be charged interest on the purchases you make if the balance is not paid in full at the end of each month. Interest rates vary by lender but tend to be on the high side because secured credit cards are geared mostly toward people who have poor credit. You are expected to make monthly minimum payments toward your balance just as you would with a traditional, unsecured credit card.
  
  

The Purpose of the Deposit

• Because of the required deposit, some people confuse secured credit cards with debit cards that people use to access money held in checking accounts. The difference is that the money in the savings account is used only when you default on the credit card. None of the purchases or payments will be deducted from the money in the account unless you stop making payments toward your outstanding balance.
  
  

Choosing a Secured Credit Card

• Secured credit cards can be a good way to re-establish your credit after a bankruptcy or other credit problems. However, some secured credit card lenders attempt to take advantage of potential borrowers. For example, some may charge interest rates in excess of 19 percent or require the purchase of insurance for the card in addition to the initial deposit. By shopping around and looking at several possible secured credit cards, you can find one that offers reasonable fees and benefits.