When you think of credit cards, what comes to mind?
For some it may be staggering debt or interest rates, for others, it may be as simple as the ability to shop online.
But the truth is, all credit cards are most certainly not created equal.
In fact, there are two different types of credit cards: secured and unsecured. Both cards allow you to purchase items anywhere credit cards are accepted, but they have some significant differences. Understanding these differences can work to your benefit if you’re interested in finding the perfect card for you.
What is a secured credit card?
A secured credit card is appropriately named: It allows you to open a card that is secured by the amount of money put on it. Whatever your security deposit is, you’ll be issued a line of credit up to that amount; put in $200, and you have a credit limit of $200. Over time, you may have the option to increase the amount of your security deposit (which will increase your credit limit), or you may be rewarded for on-time payments and usage history with a bump to your limit. Applying for a secured credit card won’t necessarily impact your credit, but your usage will be reported to the three credit bureaus if you are approved for the card.
It makes sense that card issuers would be willing to offer credit this way; their risk is greatly reduced by your security deposit which serves as collateral in case you stop paying your bill. The good news is, if and when you close the card, that money is once again yours—unless the issuer had a reason (fees, missed or late payments, etc.) to withhold the money. One of the most important things to clarify is that your security deposit is not where payments will come from. The sole purpose of the security deposit is collateral, so you must still make regular payments on top of what you’ve put down for the deposit.
Secured cards have become particularly popular with young people; in fact, a Consumer Finance Protection Bureau (CFPB) study released at the end of 2017 found that an estimated 7% of all cards issued to adults aged 25-34 are secured credit cards. And this growth is for a good reason; when it comes to spending your money, you can use a secured credit card the same way you would any other card:
- Use it anywhere cards are accepted, including in-store or online
- Improve credit with responsible use
- Avoid interest by paying balance in full
What is an unsecured credit card?
The biggest difference between a secured and unsecured credit card is that there is no collateral required with an unsecured card. Instead, a lender will look at your credit profile and history to determine your rate and limit—based on the amount you’re likely able to pay. You may find more options for unsecured credit cards, but you’ll also find more chances to overspend and get yourself in over your head.
However, credit card companies may not even look at your application if your credit score isn’t good or at least average. Or worse, you may find yourself trapped by dishonest lenders who promise you a product despite your score. Often called subprime credit cards, these unsecured cards typically have shockingly high fees—think over $100 a year—and carry even higher interest rates and fees than other cards. And of course, none of this money will be returned to you like the security deposit on a secured card.
Are there benefits to choosing one type of card over the other?
When it comes to choosing between a secured or unsecured credit card, there are benefits to choosing the former over the latter. The primary advantage is, of course, that you can help control your spending by limiting the amount of credit you have to use. But a secured credit card like the Green Dot® Platinum Visa® has even more benefits than a traditional card:
- Low entry cost: You can put down as little as $200 for your refundable security deposit.
- No credit requirements: When you apply for an unsecured card, you need good credit, particularly if you want to pay lower interest rates and fees. With a secured card, there are no credit requirements, making it ideal for those with poor credit or those who are working on building their credit history.
- Make your security deposit at retailers nationwide: Make your one-time, refundable security deposit using cash at the register of any participating retailer in the U.S.
- Get in the credit game: Perhaps you’re young and just starting to build a credit profile, or you relocated from elsewhere and have no credit history from your hometown. Secured cards can help you start building your credit with responsible use.
- Easy-to-understand fees: Don’t let surprise fees stand in between you and your money. With a secured credit card, you’ll want to understand the APR for your interest rate, and any annual costs you may be responsible for. You can view Green Dot’s simple fees here.
How does a secured credit card help you build credit?
For starters, applying for a card like Green Dot’s Platinum Visa Secured Credit Card, won’t impact your credit. Even this step helps you protect your credit, as it won’t reflect any new inquiries on your report.
But a secured credit card can also help you improve your credit when you are committed to using the card responsibly. Like traditional cards, secured credit card issuers will report card usage and payment history to the big three credit bureaus, although you should always verify this with the card issuer. By maintaining a low balance and continually making payments on time, you’ll start to improve your financial picture without racking up debt.
These five tips can help you realize a higher credit score through the use of your secured credit card:
- Charge small amounts: Use your card regularly, but try keeping the charges on it low so that your balance can be paid off entirely each month.
- Keep an eye on how much you’ve spent: Credit scores factor in how much available credit you are using, so if you’re always charging up to your card’s limit, you may not see any credit score improvement. Instead, aim for a sweet spot and use anywhere between 10-20%, but definitely no more than 30%, of your overall credit limit.
- Never charge more than you can immediately pay: The point of a secured card is to give you access to spending power while giving you a chance to improve your credit. Charging more than you can pay off defeats the purpose of the card altogether as it will cause you to carry a balance and possibly lower your credit score.
- Always pay in full: Needless to say, if you can pay your balance off in full every month, you’ll get the most significant benefit to your credit score.
- Watch your credit score: In time, you’ll see an improvement in your score if you follow these guidelines, use your card responsibly, and make on-time payments in full. Keep an eye on your credit reports so you can see your progress.
If you’re ready to take a serious step towards improving your credit, it’s time to consider a secured credit card. With responsible use, you can boost your score while continuing to live your life on your terms. Apply to get your very own Green Dot Platinum Visa secured credit card today.