Secured Versus Unsecured Credit
Beside open-end and closed-send credit, lender use two other terms to distinguish loans: secured and unsecured credit. The lender will try to ensure that the collateral is worth more than the outstanding balance on the loan, so if you default, the lender can sell the asset at market prices to recoup loses. Collateral can be a diamond ring, a car, a boat, a home, or anything else of quantifiable value.
Secured Credit
Another form of secured loan is a secured credit card. In this case, you deposit a certain amount of cash with the credit card issuer in return for a credit line of the same size. For example, you deposit $1,000 with a bank for qualify for $1,000 credit line. Because you deposit your money at bank, bank will pay some interest, usually 2 to 3 percent. If you fail to pay your monthly balance, the bank will seize enough money from your deposit amount. Getting a secured credit card is one the best way to rebuild your credit, establish a good credit or obtain a good credit if you don’t have a credit history yet.
6 Questions Before Getting A Secured Credit Card
1. What kind of charges will there be?
This is where it pays to shop around. Look for a card that doesn't charge an application fee. Every secured card charges an annual fee, and they vary dramatically. Read the fine print. Some people have gotten secured cards and found their entire limit consumed with fees before they ever used the card.
2. How much money do I have to deposit?
It’s depends on how much credit line you intend to apply. Normally, your approved credit limit will be the same with the amount of deposit, but some bank only approve you with some percentage of that amount. Commonly the minimum deposit required is $300 to $500 but again it’s different from one bank to another.
3. Where to apply for a secured credit card?
Do all banks offer secured credit card? Where to apply for a secured credit card? You may ask. The fact is no all banks are offering secured credit card. Many banks are offering unsecured credit card with lower limits and higher interest rates and fees for people who do not have a good credit record. In addition, some issuers only give secured cards to people who are new to credit - not those who have already had one crack and blown it.
4. Do you report to all three major credit bureaus?
One of the reasons you are getting a secured credit card is to re-build your good credit history. Hence, if the credit card issuer doesn’t report it to all three major credit bureaus, you have lost a major benefit of building a good credit history with a secured credit card. If other credit card companies start to offer you their unsecured credit card after you have made your payment on time for this secured credit card, it means the bank is reporting. Else, ask if the issuer will flag the report to the credit bureaus as a secured card.
5. How long does it take to qualify for an unsecured card?
The card issuer should want to keep you as a customer, so most will qualify you for an unsecured card after a period of making all your payments on time. The average is about a year.
6. How can I make the best use of a secured card to build my credit rating?
Buy a few things and pay off the card every month. You should not get these cards to carry any balance. It helps to pay in full every month to show you've got this excellent credit rating.
Unsecured Credit
With unsecured credit, lenders do not demand that a specific asset be pledged as collateral. Instead, lenders extend credit to you because of your general record of reliability and stable source of income.
In general, the interest rates charged on unsecured credit are higher than those levied on secured loans because lenders take a great risk, relying on your promise to pay rather than on their ability to seize collateral.
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