If you have a thin credit profile or want to build your credit, you may come across secured credit cards when searching for a card you can qualify for. But what’s the difference between a secured vs. unsecured credit card? And how can you gauge which one is right for you?
Here, delve into how both types of credit cards work and the differences between secured cards and unsecured credit cards, so you can decide which to choose.
What Is a Secured Credit Card?
Like a traditional, or unsecured, credit card, an unsecured credit card is a type of revolving loan. This means that it offers a line of credit that you can borrow from as needed and then repay. However, with a secured credit card, you’ll need to put down a deposit, which “secures” the credit card.
The bank holds onto that money as a form of collateral if you default on payments, but it’s refundable if you close your account or upgrade to an unsecured credit card. Your secured credit card’s credit limit, an essential part of what a credit card is, usually is the same amount as your deposit. The deposit is typically at least $200 to $500, though it can range as high as $25,000 depending on the specific card and how much you can afford to put down.
A secured credit card is designed for building credit. So, if you’re working on rebuilding your credit or don’t have much in the way of a credit history because you’re young or new to the country, it could be a good option. The age requirement to get a credit card that’s secured is the same as for an unsecured credit card.
How Secured Credit Cards Work
As mentioned, you’ll need to put in a deposit to open a secured credit card. Your available line of credit is usually the same amount as your deposit. Just like how credit cards work when it’s an unsecured card, you’ll need to repay the balance, and your credit limit will get replenished as you make payments.
As with an unsecured credit card, there’s a minimum monthly payment you’re responsible for. If you carry a balance from month to month, you’ll incur interest charges. Your credit card activity, including your payment history, is generally reported to the three major credit bureaus, Experian®, Equifax®, and TransUnion®.
Your deposit on a secured credit card isn’t used to make payments should you fall behind or miss payments altogether. If you’re unable to make payments and your account goes to default, you’ll lose your deposit. Plus, it can hurt your credit. If the balance you owe is larger than the deposit, you might be on the hook for the difference owed.
Secured credit cards may offer a “graduation” option. In other words, if you make on-time payments and show a track record of responsible financial behavior, the credit card issuer might offer you an unsecured credit card.
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Pros and Cons of a Secured Credit Card
Let’s look at some of the advantages and downsides of a secured credit card:
| Pros of a Secured Credit Card | Cons of a Secured Credit Card |
|---|---|
| May qualify with a low credit score or limited credit history | Need to provide a deposit |
| Could be easier to get approved for than an unsecured credit card | Credit limit is usually low |
| Can be a way to build or rebuild credit as activity is reported to credit bureaus | Can have higher interest rates and more fees than secured credit cards |
| Offers a revolving line of credit you can use as long as you make payments | Could lose your deposit if you’re late or miss payments |
What Is an Unsecured Credit Card?
Also known as a traditional credit card, an unsecured credit card doesn’t require a deposit or collateral of any sort. Instead, you’re offered a credit limit based on your creditworthiness and other factors, such as your income and existing debt. The lender simply has your word that you’ll pay back what you borrow, which is why you’ll also generally need a higher credit score and a more robust credit history to qualify.
Just as with a secured credit card, the credit remaining on an unsecured credit card dwindles as you rack up a balance. Once you make a payment, your limit replenishes. For example, say your credit limit is $5,000. If your balance is $500, your credit limit goes down to $4,500. Once you pay off your balance, your credit limit goes back up to $5,000.
The annual percentage rate (APR) and terms associated with an unsecured credit card are usually better than they are for a secured credit card. Typically, the better your credit score, the better your rates and terms are for an unsecured credit card. The average credit card APR is currently 22.3%; meanwhile, many of the top secured credit cards have APRs that are close to 30%.
How Unsecured Credit Cards Work
Because an unsecured credit card is a form of revolving credit, you have access to that credit line as long as you remain in good standing and your account stays open. Unsecured credit cards also require you to make minimum monthly payments to avoid incurring late payment fees and harming your credit score. You’ll owe interest on any balance that carries over from month to month.
Sometimes, unsecured credit cards might offer perks, such as cash-back rewards and travel insurance.
Pros and Cons of an Unsecured Credit Card
Here are some of the pros and cons of traditional, or unsecured, credit cards:
| Pros of an Unsecured Credit Card | Cons of an Unsecured Credit Card |
|---|---|
| Higher credit limits compared to secured credit cards | Can be harder to get approved for |
| Need at least a fair credit score to qualify (580+) | Can still incur interest and fees |
| Can help you build your credit | May entice you to spend more than you can afford due to higher credit limits |
| Opportunity to earn rewards and enjoy other benefits | Could damage your credit if not used responsibly |
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Similarities Between a Secured Credit Card and an Unsecured Credit Card
When it comes to a secured credit card vs. an unsecured credit, there are a number of similarities:
• Both are revolving lines of credit, so you’ll have access to those lines of credit as long as you keep the card open and your account in good standing.
• Your payments are reported to credit bureaus. If you make on-time payments, your credit score will improve. Conversely, it can drop if you don’t use your credit card responsibly.
• The process of how to apply for a credit card is usually similar with a secured vs. unsecured credit card. You can usually fill out an application online, in person, over the phone, via an app, or through the mail.
• Both secured and unsecured credit cards come with interest rates and fees. Depending on the card, there might be an annual fee.
• Both types of credit cards usually offer a grace period, which is the period between when your billing cycle ends and your payment due date. During this time, you may not be charged interest as long as you pay off your balance in full by the payment due date.
• While it’s less common among unsecured credit cards, both types of credit cards might feature perks, such as cash-back rewards, car rental insurance, trip and travelers insurance, extended warranties, and price protection.
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Differences Between a Secured Credit Card and an Unsecured Credit Card
There are a handful of features that set these types of credit cards apart:
• For starters, secured credit cards require a security deposit, whereas unsecured credit cards do not.
• The credit limit for a secured credit card usually matches the deposit amount. With unsecured credit cards, the credit limit usually depends on a handful of factors, such as your creditworthiness.
• Secured credit cards generally carry higher interest rates and fees, whereas unsecured credit cards typically have lower interest rates and fees.
• Unsecured credit cards usually have one variable interest rate, meaning the card’s interest rate fluctuates over time based on an index. Secured credit cards can have a fixed or variable rate.
Secured vs. Unsecured Credit Card: Which Is Right for You?
Now that you know the similarities and differences between a secured and unsecured credit card, you can start to assess which one might be right for you. Here’s a high-level overview to help you better compare what sets secured vs. unsecured credit cards apart:
| Secured Credit Card | Unsecured Credit Card |
|---|---|
| Requires a deposit to open | Does not require a deposit |
| Usually available for those with thin credit histories or lower credit scores | Usually need at least fair to good credit to qualify |
| Lower credit limits, which are based on the amount of the deposit | Higher credit limits, which are based on creditworthiness |
| Fewer card options available | Variety of card options, such as cash-back cards, travel cards, business cards, and retail cards |
Staying on Top of Your Credit After Choosing a Card
No matter if you decide on a secured credit card or an unsecured credit card, it’s important to stay on top of your payments. Ideally, you’ll pay the balance in full each billing cycle. Otherwise, you’ll owe interest.
At the very least, make sure to make the minimum payment each month. That way, your credit will stay intact and you’ll avoid late fees. If you’re struggling to make payments, reach out to the lender and see what they can do. They might be able to change the payment due date so it’s more in line with what’s feasible for you, or let you temporarily skip a payment to catch back up.
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The Takeaway
Whether you should apply for a secured credit card and an unsecured one may depend largely on your credit history and score. A secured card may be best if you have yet to establish credit or have a low credit score, while an unsecured card can be beneficial if your credit is more established and you want to earn rewards.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Is an unsecured or secured credit card better?
Whether a secured vs. unsecured credit card is better depends on your situation. An unsecured credit card might be better if you’re having trouble getting approved for a secured card and can afford to make the deposit. On the other hand, a secured credit card may be better if you have at least an average credit score, are looking for a higher credit limit, and would like more card options.
Should your first credit card be secured or unsecured?
It really depends. If you have a thin credit history, are looking to build credit, and can afford the security deposit, a secured credit card might be the best route to take as they’re generally easier to qualify for. Note, however, that you’ll probably need to stomach a higher interest rate and a lower credit limit. While an unsecured credit card doesn’t require a deposit, it might be harder to get approved for one if your credit is less-than-stellar or you don’t have much of a credit history yet.
Photo credit: iStock/cesar fernandez dominguez
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