Applying for Credit Cards

• When consumers apply for unsecured credit cards, banks check their credit reports and their current monthly income. The credit reports provide banks with information about the applicant's past borrowing habits. Banks also deduct monthly debt payments listed on the reports from the borrower's monthly income to determine what kind of monthly payment the applicant can afford.
  
  People applying for secured credit cards place cash in a savings account or CD that the credit card issuer controls. Credit line amounts on secured cards are at best equal to the amount of the deposited funds. Banks do not normally require secured card holders to have good credit.
  
  

Card Defaults

• When a credit card holder defaults on card payments, the card issuer attempts to collect the debt. State laws vary, but in many instances card issuers take card holders to court to try to collect outstanding debts. When a secured credit card holder defaults on payments, the card issuer will try to collect the debt as usual. But if the card holder does not agree to pay, the issuer simply takes possession of the funds put up as collateral and uses that money to settle the debt.
  
  

Card Features

• Merchants accept both secured and unsecured cards as a form of payment. The card issuer reports card activity to the three major credit-reporting bureaus on a monthly basis, and credit reports do not distinguish between secured and unsecured card payments. Revolving credit lines for unsecured cards are typically higher than for secured cards because most banks only issue secured cards with line amounts of $500 or less. Some issuers automatically convert secured cards to unsecured cards if the borrower regularly uses the card and makes timely payments. When cards are converted, the issuer returns the initial deposit for collateral to the card holder.
  
  

Fees and Rates

• Banks view people with good credit scores as low-risk borrowers and allow them to borrow money at low rates of interest. Even though secured cards have collateral that negates the default risk, banks still charge higher interest rates on these cards compared with unsecured cards. Additionally, secured cards usually have higher annual fees than unsecured cards do. Due to credit line limits, rates and fees, secured cards are best suited to people trying to restore or build credit, while unsecured cards are the best option for people with good credit.