@Anonymous wrote:I understand the difference between secured and unsecured debt. However, I don't understand how that works in terms of credit cards. I'm assuming with a secured card you have to pay a deposit, but how's that any different than a prepaid debit card. Do you only get the deposit back when the card is closed? I'm just curious about how that works. On this forum was the first time I've actually heard someone mention secured vs unsecured CCs.
A debit card is significantly inferior to a secured credit card.
1. It can be quite hard to rent cars and sometimes get hotel rooms with a debit card. A credit card serves as a sort of risk reduction proxy. It means you are less likely to damage the car or trash the room leaving them holding the bag. A merchant cannot tell that a credit card is secured or not but they can tell if a card is a debit card.
2. A debit card almost never has rewards due to the cap on merchant transaction fees. This cap doesn't apply to smaller financial institutions but for the larger ones, there are no rewards.
3. As mentioned, a debit card does zip to establish credit history. A secured card produces exactly the same FICO scores and credit history as a regular credit card with one exception. The account is usually noted as "secured." However, when a card graduates, the "secured" note disappears while the account history remains. There is some debate as to whether having a "secured" notation is seen as a negative upon manual review. On one hand it is an indication that a person "may*" have had marginal credit in the past. On the other hand it is one of the few things that indicates a consumer actually has assets. A 10k secured card with an average util at 10% is a very good sign a consumer is wisely managing their finances.
* I say "may" have had marginal credit because my gf opened a Citi secured card for 25k and she has a long, perfect credit history with scores over 800. She did it because the CD the card was secured with paid 4% at the time, a screaming deal. It didn't hurt her scores at all.
