Difference Between Secured vs Unsecured Credit

Difference Between Secured vs Unsecured Credit

Nowadays, individuals desire to do tasks quickly, and payment transactions are not exempt from this trend. Faced with the trouble of withdrawing or finding change to pay for a purchased item, most people today prefer to pay without cash. This is made possible thanks to credit cards – plastic cards issued by banks, financial entities, or institutions to enable the bankcardholder to make purchases within a set threshold; the bankcardholder technically borrows funds and promises to reimburse the supplier by a set date; otherwise, a penalty will be applied to the cardholder to reimburse the accumulated sums in addition to the balance used.  

This alternative payment method is now common and most merchants in urban areas accept it as a method of payment. Of course, it is also conveniently used for online transactions. What most people don’t realize, however, is that there are two kinds, and there’s a difference between secured credit card and unsecured credit card. This article will highlight these differences. However, it is interesting to start by discussing each one individually.

Definition of Secured Credit

Secured credit is a category of credit cards that requires its owner to have a deposit fund in the same bank. This means that the card is linked to the cardholder’s bank records, and any unpaid dealings can be easily deducted from that individual’s financial assets. That bank account connection is one main difference between secured and unsecured credit cards.

Secured variants also enable to establish a credit history and improve creditworthiness. A positive credit score can give them a better chance of getting approved for a mortgage, business, or personal loans.

This is the reason why a secured credit card holder needs to be a reputed payer, so he/she can maintain a positive credit score. Because this type of cards functions just like a regular credit card, they can use it for purchases that they can pay for later, preferably before the due date, so the transaction does not generate a return or a forced deduction won’t be made from their bank account. This is another distinction that makes clearer the difference between secured and unsecured credit.

Definition of Unsecured Credit

Unsecured credit is a type of credit cards that does not require a security deposit upon acquisition This implies that an individual can request and be approved for this version of a card without an existing bank account with the provider. This is one major difference between secured and unsecured credit card.

Because of this unstrict policy, most people prefer this type of card, since it means that their hard-earned savings on their bank account won’t be deducted in case of late payment. This also makes it easier to acquire one than the other. Even shopping center displays this type of card with very little documentation requirements, which makes this type attractive to most people.

The difference between secured and unsecured credit cards in terms of accumulation, though, is that the bank (or the card provider) has other means in the latter option to collect the amounts that the debtor has negotiated. They may seek a third-party collector’s assistance, file a case in court, or request for the court’s assistance in collecting the amount from the debtor’s salary.

Main Differences Between Secured vs Unsecured Credit

Now that we have explained the definition of each type of card, let’s look closer at what’s the difference between secured and unsecured credit cards by highlighting their characteristics. Below is a table with the main differences between the concepts.

Basis of ComparisonSecuredUnsecured
Function Alternative payment method, for enhancing credit score Alternative payment method, a method for late payment of purchases
Requirement Existing bank account with approver
Lack of poor credit records from banks or financial institutions
Collection method Bank account deduction or bills payment Bills payment
Management for delinquent payors Forced deduction from bank account Court case, through third-party collectors

Thanks to the tabular comparison above, you must now grasp what is the difference between secured and unsecured credit card. They are different in terms of prerequisites, accumulation method, and management for late payers. However, they are somewhat similar in their function for cashless transactions.

Difference Between Secured and Unsecured Credit: Conclusion

To objectively identify what kind of cards you will seek, it is vital to clearly grasp what is the difference between secured and unsecured credit cards. This will also assist you determine which brand you’ll open your credit card with. Regardless of your choice, it is essential that you understand the importance of being a good payer.

If you take a secured one, you must pay on time, otherwise your personal savings, which you might have saved for something else, will be reduced by your debt. Having a bad paying reputation may also impact your credit grade and reduce your chances of being approved for loans involving large sums.

If you take the unsecured kind, it is also essential that you meet deadlines in terms of payment. You don’t want to be contacted by the court if you fail to live up to your promise of paying or if you do not at least attempt to pay off your purchases little by little. A good practice will be to pay for the swiped purchase as soon as possible to keep your reputation clean and your backer, happy. After all, we are lucky to be able to make cashless transactions. What we must remember is that they’re not cash-free.