Credit cards are essential financial tools in today’s world, offering convenience and purchasing power. However, not all credit cards are the same. You might have heard about “secured” and “unsecured” credit cards. These terms represent two different ways to handle your finances.
In this guide, we’ll explore secured and unsecured credit cards. Whether you’re new to credit or rebuilding your financial history, understanding these cards is crucial. Let’s dive into the world of secured vs. unsecured credit cards to make informed financial decisions.
Secured Credit Card vs Unsecured Credit Card: Understanding the differences
Secured Credit Card
A secured credit card is a type of credit card that requires the cardholder to provide a security deposit, typically equal to the card’s credit limit. This deposit acts as collateral and reduces the risk for the credit card issuer. Secured credit cards are often used by individuals with limited or poor credit histories to build or rebuild their credit. They function like traditional credit cards, allowing users to make purchases and repay the borrowed amount, but they offer lower risk to the issuer due to the deposited funds. Responsible use of a secured credit card can help improve the cardholder’s credit score over time.
Unsecured Credit Card
An unsecured credit card is the standard type of credit card that does not require a security deposit. These cards are issued based on the cardholder’s creditworthiness, which is evaluated by factors such as credit history, income, and credit score. Unsecured credit cards provide a revolving line of credit that can be used for purchases, and the cardholder is required to make regular payments to repay the borrowed amount. Unsecured credit cards often offer various features and rewards, such as cashback, points, or miles, and are available to individuals with good to excellent credit profiles.
What is the Difference Between Secured and Unsecured Credit Cards?
The following table will help you identify the key differences between a secured and unsecured credit card quite effortlessly:
| Point of Difference | Secured Credit Cards | Unsecured Credit Cards |
|---|---|---|
| Definition | Banks or other creditors issue these instruments against the applicant’s fixed deposit maintained with them | Unlike secured cards, unsecured credit cards do not require any collateral deposit. You get these cards if you are eligible as per the lender’s minimum credit score and monthly income requirements. |
| Income | It is not essential to show proof supporting a stable source of income to collect secured credit cards. | You only receive these cards when the issuer gains confidence that you have a fixed income source and can repay the dues easily. |
| Credit Score | Secured credit card applicants do not face any difficulty even if they have low or no credit scores. | Usually, banks and NBFCs expect you to have a minimum CIBIL score of 750 to apply for an unsecured credit card. |
| Credit Limit | It is crucial to pledge a higher fixed deposit amount while applying for a secured credit card. This is because the lender allows you to avail only up to 75% – 85% of your FD amount as the credit limit. | You can get an exceptional credit limit when you have a handsome salary, and the lender witnesses a flawless credit report. |
| Collateral | Registering collateral is mandatory to grab any secured credit card. Generally, financing institutions consider FDs for this purpose. | No collateral is needed to get unsecured loans. |
| Offers and Benefits | Secured credit cards provide you with two different advantages to be enjoyed simultaneously. As you keep on using your credit card, you continue enjoying all the associated offers and benefits. Also, the FD interests start getting accumulated on a monthly/ quarterly/ half-yearly/ yearly basis. | Unsecured credit cards do not allow you to enjoy additional interest upon using the facility month over month. All you enjoy are basically personalised discounts and reward points attached to each purchase. |
| Role in Reviving a Bad Credit Report | Secured credit cards are ideal for reviving poor credit reports. | Unsecured credit cards cannot be availed with a bad credit report, as lenders consider such profiles to be highly risky. |
| Fees | Secured credit cards have almost negligible (or sometimes nil) maintenance charges. | Unsecured credit cards come with certain annual maintenance fees. However, you can waive it by spending over a certain amount, which is decided by the respective credit card company. |
| Documentation | Very little paperwork is needed when you go for this option. As the credit card issuing organisation will already be having your details as a fixed deposit account holder, you do not need to worry about submitting additional documents. | The documentation process is a bit elaborate in this case. Also, the verification stage can take some time as the lender needs to analyse your eligibility against an application placed for a particular credit instrument. |
| Impact on Credit History | You can consider having a secured credit card to revive a poor credit history and enrich your credit mix. | You can only avail of this card to further improve your credit records when you already have a decent credit history. Therefore, before enquiring about these cards, make sure to check your credit score to avoid the possibility of a rejection. |
| Relevance | Individuals having a low monthly income or those with inadequate credit backgrounds can consider applying for a secured credit card. | Unsecured credit cards are suitable for all who have a steady monthly income and a decent credit history. |
After going through the table above, you will have a clearer picture of whether to go for a credit card secured or unsecured. Now let’s know the individual application procedures so that you can finally start working on your creditworthiness.
Read More: Difference between Soft Vs Hard Credit Check
How to Apply for a Secured Credit Card?
- Research and Comparison: Start by researching and comparing different secured credit card options available in the market. Look at factors such as interest rates, annual fees, and credit limit.
- Check Eligibility: Review the eligibility criteria for each card to ensure you meet the requirements. Criteria may include a minimum age, income level, and the need to maintain a Fixed Deposit (FD) with the credit provider.
- Select a Card: Choose the secured credit card that best suits your needs and financial situation.
- Visit Lender’s Website: Go to the official website of your chosen lender, where you intend to apply for the secured credit card.
- Fill Application Form: On the lender’s website, locate the application form for the secured credit card. Provide your official name, contact details, address, and approximate annual/monthly income.
- Deposit Requirement: If you do not have an existing FD with the credit provider, you will be asked to make a security deposit using your debit card details. This deposit is used as collateral against the card.
- Approval: Once your cash deposit is approved, you will receive the secured credit card. Typically, you’ll have a credit limit of up to 85% of the deposited amount.
How to Apply for Unsecured Credit Card?
- Comparison: Begin by comparing various unsecured credit card options available in the market. Evaluate factors like interest rates, annual fees, rewards programs, and credit limits.
- Eligibility Check: Review the eligibility requirements for each unsecured card. These may include a minimum credit score, income level, and employment details.
- Choose a Card: Select the unsecured credit card that aligns with your financial goals and credit profile.
- Credit Report Review: Lenders for unsecured cards rely heavily on your credit history. Ensure your credit reports are accurate and up-to-date.
- Prepare Documentation: Gather necessary documentation, which often includes recent bank statements, payslips, and proof of employment. Having these documents readily available can expedite the application process.
- Apply Online: Visit the official website of your chosen credit card issuer and find the online application form.
- Complete Application: Fill out the application form with accurate information, including personal details, financial information, and employment details.
- Submit Application: Once your application is complete, submit it online.
- Review and Approval: The credit card issuer will review your application and creditworthiness. If approved, you’ll receive your unsecured credit card.
Conclusion
Once you’ve thoroughly compared secured and unsecured credit cards and gained a comprehensive understanding of their features, you’ll be well-equipped to make informed choices when considering your next credit card. Moreover, you’re now aware that opting for a credit card secured by your Fixed Deposit offers dual advantages. Therefore, it’s advisable to make a prudent decision and select the credit card that aligns with your specific requirements for credit limit and urgency.
