Secured Credit vs. Unsecured Credit
Posted on January 5, 2006
There are many different forms of credit available to consumers, however all forms are either classified as secured or unsecured. Secured credit is a loan or type of credit that is secured with collateral of some sort. Collateral can be cash or the item you have a loan for itself, such as a car or home.
In other words, if you don't make your payments, the item securing the loan or form of credit can be either repossessed or foreclosed on, this way the creditor is able to recover losses by reselling whatever the loan was for. If it was a secured credit card they are trying to recover losses from they will take possession of the bank account that is collateral for the card.
In addition, secured debts are not able to be discharged in bankruptcy. A secured credit card is a good resource for those with bad credit or those looking to either establish credit or obtain a higher credit score.
The limit available on these cards directly correlates with the balance of the bank account that you have given as collateral. Interest rates on secured credit are usually lower than unsecured credit.
Unsecured credit is normally a credit card with revolving credit or a line of credit that is not secured by anything other than your promise to make payments as agreed on your contract. The creditor has no guarantee, other than your agreement, that they will be paid. They cannot come and repossess anything you own or the items you've purchased with the card, this is why interest rates tend to be higher for unsecured forms of credit and they are usually able to be discharged in bankruptcy.
Make sure to know the difference between both credit types and choose the one that best fits your lifestyle and your finances.
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