Secured vs. unsecured cards
Both secured and unsecured credit cards have the same paying and credit-building capabilities. You receive a credit line, spend borrowed money on your needs, get a statement report, and pay off the balance. Still, there are some distinctions between them.
Secured credit cards
Secured cards are more affordable than unsecured. The reason is in the primary goal you pursue when applying for a secured card — establishment of your credit history and improvement of your credit score. They are marketed to customers with low or fair scores. Though the issuer treats you as a risky customer with a poor score, there is high probability of being approved.
Where is the catch? The issuer requires a refundable deposit to open an account. If you fail to pay off the debt, they subtract the necessary amount from the deposit to cover any losses you may cause. Moreover, this deposit determines your credit line. For example, you pay a $200 collateral and get a corresponding $200 credit line. You can choose how much your limit would be; usually it ranges from $200 to several thousand dollars.
Unsecured credit cards
If your score is good or excellent, you can qualify for an unsecured card. You don’t need to pay a security deposit to get it. Moreover, it often goes with various rewards like cashback, rewards points and airline miles, which make it possible to travel for free and save on your regular shopping.
Though the issuer trusts you with its money and offers various perks along with that, terms and conditions are often strict. Creditors risk lending you money. So they implement various deterrents like fees and penalties to make you responsible for your debt. But your reasonable attitude to the deal may help you avoid any forfeitures.
How to change a secured credit card to unsecured
When to convert
The reason you pick a secured card is obvious — to improve your score. It usually takes 12-18 months to see some progress. So keep an eye on your score: once you see a better score, ask for a conversion or apply for an unsecured card. But remember that the higher your score is, the more attractive an offer you may get. Having a score of approximately 650 opens the way to a traditional card, although with modest benefits. The situation is quite different when you reach a score of 700 or higher. At that point, the most enticing offers may finally be within your reach.
How to convert
Conversion is possible only if the issuer provides such an option. If a chance of conversion exists, your primary task is to make the issuer believe you are not a risky borrower any more. Through a diligent adherence to paying your bill properly and on time, you may get closer to your goal:
- Do your best to make all the payments on time.
- Keep your utilization ratio low — only spend up to 30% of your credit limit.
- Avoid any late payments and unpaid balances.
Keep in mind that not all banks are eager to upgrade your card. In that case, you have two ways to execute a conversion: to switch from one type of a card to another within the same “plastic” or to get a new card.
Request a switch
This is possible if the issuer provides an opportunity to convert. It is usually made automatically or upon request after a certain period. As the issuer itself offers the upgrade to you, it may not impact your score — just ask them to keep your account number the same.
When you make the transition, don’t forget to get your deposit back. The issuer can reimburse it either in your account or send you a check.
Apply for a new credit card
Some issuers may reject a conversion of your card. The reason may lie in your unsatisfying score or in the bank’s policy. If your score matters, just be patient: keep on improving it until it satisfies the issuer’s requirements. If the reason is in the bank’s policy, the only way left is to apply for a new card. But does it mean you should close your current one? It’s generally not a good idea, and here’s why.
Closing accounts impacts your creditworthiness. It shortens your history length, which makes up to 15% of your FICO score. Secondly, when you make a request to open a new account, the issuer checks your creditworthiness by sending an inquiry to the credit bureaus. They call it a “hard inquiry” and, as a rule, it lowers your score by several points too.
The optimal way out is to keep your secured card active, and not cancel it.
Keeping it active is a good option, especially if you are going to apply for a new card or make a major purchase in the near future. Continue using your secured card for small purchases. In that way, you may enhance your score even more, so you can increase your chances of receiving decent credit offers later.
Be sure to review the new terms and conditions of the new card. They may differ from those you had earlier. Compare travel, cashback, student, and 0% APR credit card offers and choose one with reasonable fees and attractive benefits.
Which credit card to choose
- To start your credit activity. Consider Discover it® Secured Credit Card; it has 2% cashback at restaurants and gas stations and automatic conversion to a regular card after seven months of using it.
- To improve your score. If you don’t have much money to pay as a deposit but still need to work on your score, take a look at Secured MasterCard® from Capital One® with its minimum deposit of $49.
- To rebuild your credit history. OpenSky® Secured Visa® Credit Card may help if you experienced financial difficulties. No credit check is required when you apply for it.
- To benefit from rewards. If you have a good score of at least 680 and want something more than just a line of credit, take advantage of rewards that may be in the form of cashback, points or airline miles. Look closely at the Chase Freedom® credit card, with a significant 5% cashback on rotating categories.
- To boost rewards with a signup bonus. You can get a lucrative welcome offer redeemable for travel-related perks or cashback. For example, the Chase Sapphire Preferred® credit card, with its appealing signup bonus of 50,000 rewards points, is a must-have for frequent travelers.
Pros and cons of secured credit cards
- High possibility of approval;
- Cards are helpful in establishing and restoring credit history;
- They can be converted to unsecured
- You have to pay a deposit;
- Credit line is determined by the deposit;
- There are almost no reward offers;
- Interest rates are often high.
Pros and cons of unsecured credit cards
- You don’t pay a security deposit;
- There are lucrative rewards programs;
- Interest rates are lower.
- There are strict terms of qualifications;
- Offers for poor score are limited.
The bottom line
Your choice of a card depends on your creditworthiness and needs. Having no or bad history means you’d better turn to a secured card. With it, you get a chance to establish your credit and increase your score over time. As soon as your score becomes attractive to the issuer, take advantage of an unsecured card. Thankfully, the range of options is wide and can be suitable for various personal and financial situations. Make your own choice and improve your well-being with the right credit card.