There are two types of credit, otherwise known as credit lines. Lines of credit are broken down into the following categories; secured and unsecured credit. Each with their own costs (literally) and benefits, making choosing the right one a matter of understanding all the aspects and factors that distinguish the two.
Secured Line of Credit
Requires an asset as collateral also known as an extended line of credit. Some commonly requested assets are listed below.
- Car
- Home
- Cash Deposit
A secured line of credit will most likely be the easiest line of credit for someone to procure after filing for bankruptcy or receiving their final discharge of debt. Essentially, the creditor has a minimum deposit amount that must be placed into an account before you can use the card. Most of the cards will set your credit limit in direct correspondence to your deposit amount. So, if you deposit $500 then your secured credit line will also be $500.
The Good
- Lower interest & Higher spending limits are typical for a secured line of credit especially for someone looking to establish credit after bankruptcy.
- Some secured credit cards after consistent and timely payments will change into unsecured cards with higher limits after about 2 years, this is something to look for and ask about.
- Look for secured credit cards that report your line of credit as unsecured to the credit bureaus, and make sure they report to at least one if not all three of the main credit bureaus: TransUnion, Experian, and Equifax. For more information on credit bureaus click on the following link, Credit Bureaus.
- 25 to 30-day Grace period, which means you will have 14 to 12 bills each year, respectively.
The Bad
- High-interest rates and interest on purchases starting the day of purchase. Even if you pay off your credit on time they will still charge you interest on your purchases.
- They don’t report your line of credit to any of the three big credit bureaus. This is bad because the point of getting a secured line of credit is to improve your credit history, and that only works if your consistent and timely payments are reported. For more information on how this impacts your credit score click on the link to our blog on, Credit Scores.
- 20-day or less grace periods, this gives you less time in-between bills to pay them off and also generates more times per year for a payment to be late.
- Credit lines less than the amount of collateral deposited. This is your money being deposited and you should be able to have a line of credit that reflects the asset acting as collateral.
The Ugly
- Home Equity Loan: preapproved home equity, overdraft credit line of protection, or home equity access credit line
- This is a secured line of credit that uses your home as an asset for collateral against your card. These types of secured credit come with extremely high credit limits, and high-interest rates as well. Users beware, try not to establish a line of credit with any asset, like a house that would be devastating to lose. Start with the smaller cash deposit secured cards, and stay away from the temptation of a second mortgage.
Un-Secured Line of Credit
Requires no collateral, this makes obtaining an unsecured line of credit, if not impossible, very difficult for someone after bankruptcy
Unsecured lines of credit typically look better on your credit report and have a greater impact on your credit history. However, all of this will come at a cost if you have bad credit or a previous bankruptcy because most unsecured lines of credit will charge a higher rate of interest to you. If you choose to go the unsecured credit route make sure to pay your bills on time before your grace period runs out.
The Good
- Looks better on your credit report and helps to repair and rebuild your credit score.
- Allows you to establish credit with no cash or money upfront.
- Rewards and cashback offers, that can benefit customers that make consistent and on-time payments.
The Bad
- Sub-prime lenders (i.e. near-prime, subpar, non-prime, and second-chance lending) offer loans to people who have difficulty making payments, and because of this they offer rates above sub-prime rates.
- Higher interest rates
- Cards with no bank affiliation. Make sure you never give any money for a credit card unless you know what bank is issuing the card, and if the bank is legitimate. Here is a link to the Better Business Bureau website, a resource you can use to check banks and credit cards.
- Avoid membership fees for credit card companies. Especially those that do not disclose interest rates.
The Ugly
- There are credit card companies out there that specifically seek out people after bankruptcy. They know that after bankruptcy you are trying to rebuild and establish credit.
- Avoid any company that: does not give you an interest rate in writing, requires an annual membership fee, states in fine print that they can withhold reporting to credit bureaus.
In Conclusion
Overall, both secured and unsecured lines of credit have their pros and cons. After bankruptcy, you might want to save your cash for a deposit on a secured card. On the contrary, you might not have the cash, or want to use your cash for other reasons and thus be interested in an unsecured card. You do not have to decide what you want before you start looking at credit card applications. Instead, write down a list of qualities you are looking for in both secured and unsecured cards before you start looking and rate each card in accordance with your initial list.
For more information on what to look for in a credit card, click on the following link, Research Twice, Inquire Once, for a blog on how to research into credit cards and save your inquires.
Another blog you might find useful regarding secured and unsecured credit cards is 10 Best Credit Cards After Bankruptcy Discharge.
