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What's the Difference between Secured and Unsecured Credit Cards?

If you have poor credit or no credit history at all, secured credit cards are still one of the best ways to get actually get your hands on some credit and start building positive payment history again. Chances are high you will get approved, and most reputable card issuers will even report your payments to all three of the major credit bureaus.

If a credit issuer doesn't report your payment history to all 3 major credit bureaus, take a pass on the card. There are plenty of other good options that do, and a secured credit card really loses its value to you if payment history isn't reported. So, what's the key difference between secured and unsecured credit cards?

In one word—collateral. A secured card is "secured" because you're required to deposit a certain amount of cash with the bank issuing the card. In addition, your credit limit will be the same or perhaps even less than the amount you deposit. So, unlike an unsecured credit card, which provides you with a credit limit in return for your promise to repay whatever you spend, secured credit cards will hold the cash you deposit as collateral in case you fail to pay your future credit card bills. For example, if you deposit $1,000 in cash with the credit issuer, then your credit limit will likely be $1,000.

And since you have basically pre-paid for the maximum amount you may charge to the card, the creditor is guaranteed you will never miss a payment. As you spend responsibly and pay your bills on time, most banks will reward your diligence by reporting your payment history on a monthly basis to Experian, Equifax, and TransUnion. This in turn will help improve your FICO scores until you reach the point when you can get approved for an unsecured credit card with lower fees, better terms, and more rewards.

As always, it will take time and financial discipline to build or repair your credit history, but your diligence will certainly pay dividends in the future. If you're on the hunt for the best secured credit card, check out our complete review of the Capital One Secured MasterCard, which has a low annual fee of $29 and offers credit lines of up to $3,000. Among its competition, it's the best secured credit card on the market at the moment and is one of our recommended credit cards for bad credit. Last Updated on May 28, 2012

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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Quora's picture

Are secured credit cards still a good way to add positive trade lines to your credit history?...

Using a secured credit card is still one of the best ways for those with bad credit to start rebuilding positive payment history again. There are good ones and not so good ones, so do your research online and choose a card with minimal fees that report...