Almost every person in the modern world has used a credit card at one time or another in their life. Such cards come in handy when one is traveling or for the convenient purchase of goods and services. However, consumers should keep in mind that when the interest rate charged by the credit card company is taken into consideration, the cost of the items purchased is higher than the cash price for the same merchandise. Although this may be considered a negative characteristic of credit cards, there are also positive aspects regarding the purchase of items on credit. For example, a person may be in need of a high priced item for which he or she does not have the means to buy outright. If this item is purchased on credit, it can be paid off little by little, even though a small part of the monthly payment will go toward interest.
The Difference Between Secured and Unsecured Credit Lines
Although secured and unsecured credit cards are used in virtually the same way when one is making purchases, unsecured cards are really the only type of card that offers a genuine line of credit. With this type of card, the bank or credit card company is essentially advancing the necessary funds to a consumer for the purchase of goods or services and trusts that the person will repay the money based on a predetermined monthly payment schedule. In comparison, secured credit cards rely on a monetary deposit that is made by the consumer before the card is issued. This way, if the individual defaults on his or her payments, the lending institution can access this money to repay themselves. It is essentially the same as putting up collateral for a loan, only in the case of a secured credit card the collateral is money.
The credit limit with such a card is typically equal to the amount of monetary collateral the consumer initially gave the lender. In this way, a person who does not qualify for an unsecured line of credit can still enjoy the convenience of a credit card for purchases or for use when traveling.
Pros and Cons
There are pros and cons associated with both credit card options and it is wise for consumers to take them all into consideration before making a choice. Most individuals with good credit opt for unsecured cards as these cards have less restrictions than secured cards and the credit limit is not dependent upon a deposit being made by the consumer. In addition, those with good credit are typically offered a low rate of interest on their purchases. However, it is easy to run up the balances on such cards and many lending institutions continually raise the credit limit for the purpose of enticing clients to spend more money. Therefore, those who have a tendency to overspend may wish to avoid this type of card.
The primary benefit of secured credit is the fact that consumers with bad credit can still enjoy the convenience offered by a credit card. In addition, consumers can use such cards to improve their credit rating. Whether or not a card is secured, making timely payments on it will create a positive record with the three credit reporting agencies. Banks and other lending institutions consult such agencies when evaluating whether or not a consumer is a good risk for a loan through their annual free gov credit report or by obtaining their credit score. Provided one’s other bills are paid in a timely manner, a secured credit card is a great tool he or she can use to begin establishing a positive credit rating.
Such cards also benefit those who have never had credit. Such individuals must begin establishing credit at some point in time, as a person with no credit history is rarely given a loan for a large purchase such as a home or a car. This can present difficulties for the consumer when these items become necessary. In this respect, a secured card is a good tool for the purpose of establishing credit. The negative aspects of such an arrangement is that one must come up with a lump sum of money with which to open the account, and he or she will probably be charged a high rate of interest even though the card is secured.
Credit cards can be handy tools when used wisely, and the type of card a person chooses will largely depend on his or her past credit history and current credit needs. For this reason, consumers should weigh all the pros and cons before making a final decision.