Finance

How Do Secured Credit Cards Differ From Standard Ones?

Credit cards are common. According to the Federal Reserve Bank of Atlanta, 75.5% of consumers own at least one credit card, and some have a walletful. By using a credit card, you build a credit history, which helps create your credit score. To be approved for a loan with low-interest fees, you need a good score. That’s one reason credit cards are essential.

The question isn’t whether you should own a credit card, but what kind? There are two popular options: secured and standard credit cards. In truth, secured credit cards and unsecured ones have a lot in common. Both cards offer benefits, like the ability to borrow money when you need to. And both present drawbacks, like interest charges and fees. If you’re trying to decide between a secured card and a standard one, you should consider your circumstances and goals.

Credit Cards

If your credit score is low and you want to build it up, try a secured card. It can help because it’s designed for people with low or nonexistent credit. However, if you’re looking for a credit card that offers a lower interest rate, a standard card might be best.

Both secured and standard cards can help improve your credit — you just have to pick the right option for you. In this article, we discuss the benefits of both types to help you make the best decision.

What’s the Deal With Secured Credit Cards?

1. They Keep Consumers From Acquiring Debt

Secured credit cards carry fewer risks than standard ones. To acquire the card, you have to pay a security deposit, which is usually equivalent to the card’s credit limit. For example, if you put down $500, your limit will be $500.

The security deposit works as an insurance policy. If you default on a payment, your deposit will be used. This keeps consumers from acquiring debt that could negatively impact their credit score.

While paying a deposit to get a credit card isn’t ideal, the money will be returned if you keep your account in good standing. The money will also be returned if you close your account.

2. They Usually Have Higher Interest Fees

If you carry a balance on your secured card, you’ll have to pay interest, just as with a normal card. Unfortunately, this interest rate is usually higher than for standard credit cards.

Even with the security deposit, you’re still expected to pay the minimum balance each month. If you don’t pay on the due date, you’ll be charged a late fee. If you don’t pay 30 days after the due date, you’ll be charged a late fee and interest. The longer you wait to pay, the more interest you’ll acquire.

3. They’re Great for Those With Poor or Nonexistent Credit

If your credit score is less than optimal, you’ll most likely struggle to get approved for a standard credit card. That’s where secured cards come in. According to the Federal Reserve Bank of Philadelphia, 44.7% of secured credit cards were opened by an individual with absolutely no credit.

Because secured cards require a monetary deposit, they’re less risky to the issuer. That means it’s easier to get approved if your credit isn’t in good standing or you’re just starting to build credit.

4. They Sometimes Come With Extra Fees

Similar to standard credit cards, you might have to pay fees with a secured credit card. For example, an application fee, balance transfer fee, etc. Before choosing your card issuer, make sure you do your research. Some secured cards don’t require an annual fee, or if they do, the fee is lower.

5. They Can Improve Credit Score

There’s a common misconception that secured credit cards are like prepaid debit cards. Not so much. While your deposit determines how much money you have to spend, secured cards — unlike prepaid debit cards — generally report to credit bureaus. This means your account history will be included in your credit report. So if you keep your account in good standing, your credit will improve.

What’s the Deal With Standard Credit Cards?

1. They Usually Have Higher Credit Limits

If your credit is good, you’ll likely be approved for a credit card with a higher limit. While this can help you afford bigger purchases, there are risks. The higher the limit, the more money you can spend, and the more debt you can acquire. That said, if you maintain spending discipline, having a higher credit limit could be beneficial.

2. They Offer More Perks

Standard credit cards typically offer a wide range of rewards and benefits. For example, your spending can earn you miles for travel, and a good credit score could yield 0% APR offers. People with good credit can apply for other cards that offer even more benefits. Unlike with secured cards, using a standard card could actually help you earn money back thanks to all the perks.

3. They Require a Good Credit Score to Qualify

The main reason secured credit cards are popular is that they’re easier to get. Standard cards, on the other hand, require a certain credit score. To give you a ballpark, a good credit score is considered to be somewhere between 670 and 739. The better your score, the better credit card you’ll be approved for.

Which One Should You Choose?

No one’s financial situation is the same, which is why there are different credit card choices available. What works for your wallet might not work for your friends’, and vice versa.

When choosing between a secured and standard card, you should first take a look at what type you qualify for. Then, shop around for the best card. Regardless of whether you’re shopping for a secured or standard credit card, you have options as to which issuer you choose.

After you get your card, strive to spend wisely. Paying late or missing a payment entirely will negatively impact your credit score whether you’re using a secured or standard card. If you’re seeking help in managing your money, there are many tools out there that offer assistance for financial management. At the end of the day, the only way to improve or maintain a good score is to adopt good spending habits.

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