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What is the difference between a secured credit card and an unsecured credit card?

Anyone comparing a secured credit card to an unsecured credit card wouldn't be able to tell the difference between them—at least not just by looking at the secured credit card. But that's where the similarity between an unsecured credit card and a secured credit card stops. A secured credit card isn't even a credit card, really, since you're not borrowing any money when you use it. The money spent comes from a pre-paid amount that you put on the secured credit card, and you can spend only up to that amount against the card.

A secured card has several valuable applications:

• A secured credit card can be used to help re-establish bad credit
• A secured credit card can teach new users of credit how to wisely use that credit
• A secured credit card can help you keep a limit on spending

A traditional unsecured credit card

This kind of card is what most of us carry—a VISA, Mastercard, Diner's Express, and many others. In this kind of card, you, as a user, are advanced a certain amount of credit based on your credit rating. So, for example, you might have a VISA card, which allows you to spend up to a limit of $1,000 each month. If you make regular payments against this limit, and prove yourself responsible with the card, the credit card agency will usually increase your credit line. With an unsecured credit card, you also have finance charges, including an annual percentage rate (APR) and possible monthly fees, may be allowed cash advances against the card, can earn Airmiles and Aeroplan points, receive cash back on some purchases or loans, special interest rates on car or home loans, special discounts at hotels, restaurants, and on car rentals, and many other valuable offers.

The new secured credit cards

A secured credit card is a good option if you're trying to restore bad credit, budget your spending, or teach a new credit user how to use credit wisely. There are things you should look for in this kind of card when you're selecting one for yourself or someone else.

• Be sure your secured credit card will submit credit bureau reports if you're using the card to rebuild your credit
• See what the annual fee will be (it can vary considerably) for the secured credit card
• Some secured credit cards offer rewards plans (air miles or aeroplan)
• Some secured credit cards even have cash back options and many of the other benefits and rewards of unsecured credit cards

A secured credit card can be a great way to have the option of credit, without the risk of credit. For someone trying to restore bad credit, a secured credit card may be the best—and possibly only—way to go.

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