Content of the material
- Secured vs. unsecured credit card: Whats the difference?
- What is a secured credit card?
- Unsecured Vs. Secured Credit Cards
- How to choose between a secured vs. unsecured credit card
- What is the difference between a secured and unsecured credit score?
- What Credit Score Is Required for an Unsecured Credit Card?
- What are the benefits and hazards of secured cards?
- What is an unsecured credit card used for?
- How a Secured Credit Card Works
- How to Apply for a Secured Credit Card
- How Do Secured Credit Card Deposits Work?
- Who Qualifies for Unsecured Credit Cards
- Alternatives to unsecured credit cards
- Advantages of Unsecured Credit Cards
- Credit Card Interest
- Do secured credit cards build credit?
- Learn more about What is an unsecured credit card? and other debt-related matters
Secured vs. unsecured credit card: Whats the difference?
The key difference between a secured credit card and an unsecured credit card is that a secured card requires collateral. (We'll go into more detail on what that means below.) It's why an unsecured card is harder to qualify for.
What is a secured credit card?
A secured credit card requires you to have collateral. Collateral is some asset or item of value you can use to get a personal loan or credit card account. If you don't pay your debt, the lender can take your collateral to get back their money.
In the case of a secured card, that collateral is a security deposit. It usually equals the credit line on the card. Say you have a secured card with a $500 credit limit. You would be required to deposit $500 into a special savings account controlled by the lender. You could charge up to $500 on the card at a time. As you paid down your balance, you could charge again and again — just like with a regular card.
If you didn't pay your bills, the lender could take the $500. But the objective is for the $500 to remain in the special account while you make monthly payments. The lender reports the payments to the credit reporting agencies, helping you to build credit.
Unsecured Vs. Secured Credit Cards
So, what is the difference between secured and unsecured credit cards? There are a few key distinctions. Being aware of the main differences will help you choose the right type of card for your financial situation.
Simply put, secured credit cards require an upfront cash payment as collateral when you open the account. Unsecured credit cards don’t require collateral. For approval of either type of card, the issuer reviews your financial history, including your credit score, to determine if you’ll be able to make payments.
Here’s a quick comparison of secured and unsecured credit cards, check out the chart below.
Unsecured Credit Cards:
- Don’t require a cash deposit as collateral
- Lower interest rates than secured cards
- Usually requires a positive credit history
- Possible annual fee
- Often has higher credit limits — anywhere from $500 to $15,000 and beyond
- Usually offers reward programs (point systems or cash back)
- Lender doesn’t have ability to seize additional cash if you default on payments
- May build and strengthen your credit history and score
- When a cardholder fails to make payments on-time, they’re subject to late fees, interest rates, and having their account sent to collections
Secured Credit Cards:
- Requires a cash deposit as collateral
- Higher interest rates than unsecured cards
- Usually granted to those with low credit scores or limited credit history
- Possible annual fee (typically higher than unsecured cards)
- Often has lower credit limits, such as $500 or $1,000
- May offer reward programs (point systems or cash back)
- Lender has ability to seize the cash deposit should the cardholder default on payments
- May build and strengthen your credit history and score
- When a cardholder fails to make payments on-time, they’re subject to late fees, interest rates, having their account sent to collections, and seizure of the money in the secured account
Overall, unsecured credit cards provide lower interest rates and better terms for cardholders. They also tend to offer more lucrative reward programs and don’t require collateral. For those with limited credit history or low credit score, a secured loan may be the best opportunity to build credit and eventually transition to an unsecured credit card.
With credit cards often being required to book airline tickets, reserve seats at a show, or buy items online, having an unsecured credit card can make life a whole lot easier. Being responsible with your payments and avoiding late fees and interest rates may help strengthen your credit history. If you’re not careful with your payments and fail to make them on time, your credit history could suffer.
By continuing to build your credit and increase your score — through unsecured credit cards and other methods — you improve your overall financial standing. Smart decisions about your budget and credit put you on the path to a life of wealth and prosperity.
How to choose between a secured vs. unsecured credit card
Here are a couple ways to help choose between a secured vs. unsecured credit card:
- Consider your credit history: If you have no credit score or a low credit score, then a secured card may be your best and only option.
- Compare card features: Compare the interest rate, rewards programs, annual fee, and the cardholder perks on multiple unsecured and unsecured credit cards before you choose.
Most people deciding between secured vs. unsecured cards will find an unsecured card is a better option if they can qualify for one.
What is the difference between a secured and unsecured credit score?
A secured credit card is one that requires a deposit to fund your credit card. An unsecured card is different because it does not use a deposit and instead extends a line of credit that you repay over time.
What Credit Score Is Required for an Unsecured Credit Card?
Unsecured credit cards often have a higher credit score requirement than secured credit cards, but it’s possible to qualify for an unsecured card with poor credit. In general:
- The best credit cards for bad or poor credit are a mix of secured and unsecured cards.
- The best credit cards for fair credit tend to be unsecured cards.
- The best rewards cards are unsecured cards, although there are secured cards that offer rewards.
The exact credit score requirement can depend on the credit card, and it often isn’t shared with the public. In some cases, there might not be a minimum credit score. And, even if your score is above the minimum, other factors can impact your application. For example, you could have an excellent score and still be denied if you opened too many credit cards recently or your income is too low.
What are the benefits and hazards of secured cards?
One of the biggest benefits of a secured credit card is that it can be easier to apply for when you’re trying to build credit from scratch.
When working on improving your credit, you’ll want to make sure that whatever card you get reports to the three main credit bureaus. This is one of the benefits of secured cards, but be sure to ask the card issuer to confirm this before applying for one. The card issuer may even advertise it on its site, too.
There are also some downsides to secured cards that you’ll want to be aware of. Some secured cards have higher interest rates, annual fees and other charges. And rewards for secured cards can be sparse or nonexistent.
What is an unsecured credit card used for?
Using an unsecured card can help to improve your credit rating. By regularly using your card and paying the balance off each month, you can demonstrate to the credit reporting companies that you are a good credit risk.
How a Secured Credit Card Works
Most credit cards are unsecured: There is nothing guaranteeing or “securing” your ability to pay off your accrued balance, which is basically money that you owe to the credit card company. Its contract with you has you agreeing to pay your balance in whole or in part each month, but you’re not putting up any of your assets or income to back that promise. (That’s one reason why credit card interest rates are so high: Unsecured debt is always more costly than secured debt, such as mortgages or car loans, to compensate for the lack of collateral).
How to Apply for a Secured Credit Card
You can apply for a secured credit card in the same way that you would apply for a regular credit card. They are issued by nearly all of the leading credit card lenders, like Visa, Mastercard, and Discover, and look just the same.
Cardholders can use the card anywhere that the card brand is accepted and may be eligible for perks and rewards. Cardholders also receive monthly statements showing their end-of-period balances and the activity on the card during the specified month. They’re responsible for paying at least the minimum due, and they pay interest on outstanding balances, which is detailed in the credit agreement.
Secured credit cards may come with an annual fee—like on a regular card. They may also impose a few other charges, like initial setup or activation fees, credit increase fees, monthly maintenance fees, and balance inquiry fees. All these can and do cut into the deposit and the amount of available credit, so they bear examining before signing up.
With secured credit cards, you do put up something as part of your agreement with the card company. When you apply for secured credit cards, the card issuer assesses your credit score and credit history through a hard inquiry with a credit reporting agency. It then determines the amount of deposit needed to open an account and the credit line that will be extended.
How Do Secured Credit Card Deposits Work?
With a secured credit card, the amount of cash that you put down as a deposit becomes your credit limit—the amount you can charge on the card. Since the deposit made to open the secured credit card account serves as collateral, it is not accessible to the borrower once it has been paid, but it stays in reserve.
You can lose your deposit, but usually secured card issuers will use it only if you default or miss a certain number of payments. If you cancel the card, you receive your deposit back, assuming your balance is paid off. Alternatively, some secured credit card providers will review a borrower’s payment history on a regular basis, and will convert a secured credit card into a regular credit card if they regularly meet payments. In this case, you will also receive your deposit back.
Who Qualifies for Unsecured Credit Cards
Credit card companies want assurances that any money lent to you with a credit card will be paid back on time. They want to know that you are responsible enough to make the minimum monthly payment each month, if not more than the minimum monthly payment. Know, that you are more than welcome to pay off your credit balance each month, especially if you want avoid paying interest charges.
Credit card companies look for people who will spend responsibly and not overextend themselves financially. Your credit score is a strong indicator of what type of person you are as it pertains to your spending habits and general behavior concerning debt. Those with a good score 670 or more have the best chances for approval of an unsecured credit card.
Alternatives to unsecured credit cards
If your credit score is on the lower end of the scoring range, you have a higher chance of getting a credit card if you apply for one that allows for a lower credit score.
Another way to get an unsecured credit card with a bad credit score is to become an authorized user on someone else’s account. Authorized users don’t have to meet the same credit score qualifications as primary cardholders because they aren’t responsible for making payments on the credit card account. Despite not having any legal responsibility for paying on the credit card they are authorized to use, authorized users can reap the benefits of card activity on their credit scores. You just have to make sure that the card issuer includes authorized users in their reporting. So, as an authorized user, you can have access to a credit card and build up your credit score at the same time.
One final thing you can do to get an unsecured credit card with a bad credit score is simply to work to improve your credit score. One way to do that is by applying for a secured credit card. Using a secured credit card for small purchases and paying your balance in full each month is a great way to establish a reliable payment history and increase your credit score. Another thing you can do to increase your credit score is to sign up for Experian Boost. Experian Boost is a free program that gives you the ability to include your regular payments for things like your cellphone and your rent into your payment history on your credit report.
Advantages of Unsecured Credit Cards
Despite the potential legal hazard of having an unsecured credit card, most people would choose an unsecured credit card over a secured one, because that means they don’t have to pay out money initially—money that could be in the bank earning interest. Additionally, unsecured credit cards typically have lower interest rates and offer rewards programs—rare features on secured credit cards.
Credit Card Interest
Credit cards calculate interest by using your average daily balance (the average balance on your credit card in a given billing cycle). If your APR(annual percentage rate) is 12%, 12 will be divided by 365 (the number of days in a year) and multiplied by the average daily balance to determine how much interest you will pay for that month.
Do secured credit cards build credit?
They can. Secured credit cards are aimed at people with limited or poor credit history and can be a good way to improve your credit score. By making regular, reliable payments on a secured credit card, you can improve your credit score and access less expensive forms of credit.
Learn more about What is an unsecured credit card? and other debt-related matters
American Consumer Credit Counseling (ACCC) is a nonprofit agency that provides free counseling to consumers who want to become free of debt. Our certified credit counselors can answer your questions about unsecured credit cards and help you understand all of your options when it comes to paying down your debt. We can help you make a plan for paying off high interest credit cards, explain the pros and cons of a plan to pay off credit card debt with loan and answer questions like “What are my credit card debt options?”
Contact the certified credit counselor at ACCC to get answers to questions like “What is an unsecured credit card?”, “How do I consolidate loans?” and “How do i consolidate credit card debt without falling more deeply in debt?”