The difference between traditional and secured credit cards

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By Zina Kumok, Financial Health Counselor, Credit Counselor

When you're watching TV and inundated with the deluge of credit card ads, you probably don't stop to consider the details.

Credit cards are common today, yet few people realize the various types available. With store, cash-back, travel and other rewards cards flooding the marketplace, you may have missed the lesser talked about secured credit cards.

Secured cards aren’t as heavily advertised as traditional credit cards, but they still serve an important function for people who are trying to establish or rebuild their credit. Here are the main differences between a secured credit card and a traditional credit card so you can decide which option may be best for you.

Collateral

Most of the credit card offers you see are for unsecured cards. These cards have a predetermined credit limit range that partially depends on your credit score.

Users with low credit scores or no credit history rarely qualify for these cards, which typically require a 600 credit score or higher. Secured cards are designed for consumers with lower credit scores. Because of this, they require collateral before consumers can receive the credit card.

For example, a secured credit card with a limit of $500 would require you to first pay $500 to the credit card issuer. The credit card company uses the deposit to cover their losses in case you run up a balance and don't pay. The credit card company returns the initial deposit once you close the account or convert the card into a traditional credit card.

Some providers require a deposit smaller than the credit limit. For example, the Secured Mastercard from Capital One allows people to transfer as little as $49 for a $200 credit limit. After a few months of making on-time payments, the company will extend the credit limit without an extra deposit.

Unlike other secured credit card issuers, Self offers a secured credit card that lets you use the savings progress in your Credit Builder Account as the deposit. This effectively lets you build your deposit in installments while you're also building credit and saving money.

But a traditional credit card with a $5,000 limit doesn’t require any collateral. Your credit score and history act as the proof of being able and willing to pay back the balance.

Rewards

Many people use credit cards to earn rewards, including travel miles, cash-back perks, and redeemable points. Some credit cards even include sign-up bonuses that users can earn if they spend a certain amount within the first 90 days. These bonuses range from $100 to $500 and up to 50,000 miles. A savvy shopper can earn free trips and hotel stays by using credit cards carefully and strategically.

Secured credit cards usually don’t have rewards programs. Exceptions include the Discover it Secured Card, which pays 2% cash back on groceries and gas stations and 1% on other purchases.

Interest Rates

Interest rates are a compelling reason to use a traditional credit card instead of a secured card, if you can qualify for the former. Most secured credit cards have higher interest rates than their traditional counterparts to compensate for customers having lower credit scores.

The Citi Secured Mastercard, for example, has a fixed APR of 22.24%. However, the Citi ThankYou Preferred Card has a variable APR between 13.24% to 23.24%. Those with high credit scores and immaculate financial backgrounds could have a below-average APR of 13.24%.

The difference interest rates can make on your overall balance can be staggering. For example, if you only make $30 minimum payments on a $1,000 balance with 24% APR, you’ll pay $664 in interest. An APR of 14% would cut that interest by more than half to $274.

This is why it literally pays to have a great credit score.

Fees

Some secured credit cards come with annual fees, which add to the cost of having bad credit. There are a few secured cards without an annual fee, but they’re the exception to the rule. A more likely scenario is the BankAmericard Secured Credit Card, which has an annual fee of $39 as of this writing.

Many unsecured credit cards also have annual fees. The difference is that those frequently have high cash back percentages or other rewards that minimize the the annual fee’s impact.

The American Express Blue Cash Preferred Card, for example, has a $95 annual fee, but also comes with 6% cash back at grocery stores, 3% at gas stations and 1% on other purchases as of this writing. A family who spends more than $125 a month at the grocery store would easily recoup the annual fee’s expense.

Traditional credit cards also often offer free foreign transaction fees. These fees are typically 3% of the purchase and can add up quickly if you’re on vacation abroad. For example, if you spend $2,000 while on vacation, you would pay $60 in foreign transaction fees.

What’s the same

Despite these differences, both secured and unsecured credit cards are viewed the same by merchants. You can use a secured credit card to shop the same way you use a traditional credit card, and store owners won’t be able to tell the difference.

A secured credit card also builds your credit in the same way as a traditional credit card. Most credit card issuers report your account to the credit bureaus, which affects your credit score and report. If you make on-time payments while using a secured card for a few months, your credit score may improve enough to qualify for a traditional card.

About the Author

Zina Kumok is a Financial Health Counselor and Credit Counselor who writes extensively about personal finance.

Written on December 8, 2016

Self is a venture-backed startup that helps people build credit and savings.
Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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