What is Secured or Unsecured Credit?

Posted by: Meredith K. | Mar 21,2008


If you look at the terms secured and unsecured credit, you might think that “secured” implies a better type of credit card.  Actually a secured credit card is for a weaker type of credit card applicant.  Secured cards are aimed at people who have had trouble getting another type of credit card due to bad credit, short credit history, or some other financial mishap, such as a bankruptcy.  

A secured credit card works something like a debit card, rather than a traditional credit card.  With secured credit, you deposit money into a separate account.  You are not borrowing a creditor’s money, but instead borrowing off money you’ve already deposited.  Why bother paying interest on money that you already have?  Because paying off a secured credit card can have the same affect on your credit rating as paying off a standard credit card.  A credit report registers an unsecured or secured credit card in the same way.  Just using a debit card will not elevate your credit rating.

So secured credit is a good option for those people whose credit rating has tanked and even possibly unable to open up a bank account.  A prepaid credit card is like a traveling bank account where you can deposit a paycheck and other checks just as you would to a bank account.  When signing up for a prepaid secured credit card it’s a good idea to see if there are any fees associated with direct deposit.

Unsecured credit cards are everything else: what are typically referred to as credit cards.  Instead of depositing money into account, the account starts with a zero balance.  You borrow money from the creditor and then are charged interest for the privilege.  The less interest you pay, the more of your monthly payments will go to your overall balance.  

One drawback to an unsecured credit card is that you cannot deposit money into the account, raising your credit limit automatically.  For most, this is not a problem, as the credit limit on an unsecured card is generally higher than a secured card and will go up over time.  

If you’re in the market for a secured or unsecured card, Experts on Credit has plenty.  Look under prepaid cards for secured credit cards, and every other category for unsecured credit cards.  

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