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Most well-known credit cards on the market, like the ones you see TV advertisements for, are unsecured credit, meaning the lender offers you a credit limit based on trust (and your credit score).
The lesser known credit card option is secured credit cards. These credit cards are backed by collateral, usually in the form of a security deposit, but otherwise, work just like a regular credit card does.
But, aside from the credit type, how do these two products compare to one another, and more importantly, which product is better for your financial situation?
To come up with an answer, let’s take a look at how these two products work, how they are different, and explore the issues you need to consider when choosing a credit card product.
What Is a Secured Credit Card and How Does It Work?
Traditionally, most regular credit cards are unsecured. This means that you are offered a credit line with no collateral.
A secured credit card is a type of credit card that requires collateral in the form of a security deposit. This cash deposit secures your credit line. This way, if you suddenly stop making payments, the card issuer can use your security deposit towards your balance.
A secured credit card starts the same way as an unsecured card. You will fill out a credit application and the card issuer will pull your credit. Though there are some lenders that will waive the credit pull requirement.
Once you are approved for the secured credit card, part of the activation process will involve putting down a security deposit. Usually, this fixed deposit amount will be used to set your initial credit limit.
So if you put up a $500 security deposit, then your initial credit limit will be $500.
As you make on-time payments every month, the credit card company can extend you additional unsecured credit. So your $500 deposit may get you a $1000 credit limit.
When it comes to how these secured cards report, they usually appear on your credit report in the same way an unsecured credit card does. Your payment history, credit limit, and utilization will all be reported to the credit bureaus.
But just because that is how it usually works doesn’t mean it is the same for all secured credit cards. Check the fine print to make sure the card reports to all three bureaus and that they report all information, not just negative information.
Generally speaking, a secured credit card is a product that you only hold temporarily with the goal of improving your credit and transitioning to an unsecured credit card. (See also What Is a Secured Credit Card? article.)
Secured vs Unsecured Credit Cards: What Are the Differences?
There are many similarities between a secured credit card and an unsecured credit card. They both report to the credit bureaus, they are both accepted wherever the issuer is accepted (i.e. Visa, Mastercard, etc.), and they both charge interest on your balance.
But that is where the similarities end.
There are many differences between how these two types of credit cards work and who they are designed to benefit.
Summary of Differences
|Secured Credit Card
|Unsecured Credit Card
|Credit Score Needed
|Bad Credit & No Credit accepted
|Good to excellent credit needed
|Credit Limit Offered
|Credit line dependent on security deposit
|Usually starts around $1000
|Only offered through a few lenders
|Offered by almost all financial institutions
|Dependent on your credit
|Can be loaded with fees
|Less fees for good credit
|Few if any
|Cashback, points, and more
Now let’s take a more in-depth look at some of the key differences between the two card types.
Credit Score Needed
The first way in which a secured card is different from an unsecured card is the credit score needed to apply.
Many unsecured credit cards require a good credit score which starts around 670. And some premium cards may require an even higher credit score.
Secured credit cards on the other hand are available for those with poor credit scores, bad credit history, and even those who have not yet established credit history (no score). Some secured cards even come with automatic approval that don’t require a credit check.
Credit limits on unsecured cards usually start in the neighborhood of $1000. Some cards geared towards college students or those with fair credit come with a starting credit limit that is lower.
An unsecured credit card can have a credit limit as low as $100. And since your initial credit limit is determined by the size of the security deposit you put down, you don’t often find secured credit cards with higher credit limits.
The exception is when the card issuer begins to offer you unsecured credit on top of your security deposit. Then your credit limit can climb into the range of unsecured credit cards.
In the majority of cases, an unsecured credit card comes with zero rewards. There are a handful of secured cards that do come with rewards, but the level of rewards offered is usually a fraction of what is available on an unsecured product.
One of the attractions of credit cards is the rewards offered. Unsecured credit cards offer all types of rewards including cash back, earning points, loyalty status (i.e. hotel or airline), waived fees, introductory offers like 0% APR for 12 months, partner discounts, and more.
A good rewards credit card that is managed properly can actually make you money!
Interest Rates & Fees
Interest Rates vary widely across credit card products. The interest rate you receive on a card can be based on the level of rewards it offers, but generally speaking, the state of your credit determines your interest rate.
This means that secured cards with low credit score requirements usually come with much higher interest rates than their unsecured brethren.
Fees are also an important fact to consider when comparing secured and unsecured credit cards. While certain rewards cards (unsecured) can come with an annual fee, the fee can usually be offset with the value of rewards or perks the card comes with.
Secured credit cards on the other hand almost always come with an annual fee or even a monthly fee.
Secured cards are also more likely to charge other types of fees like foreign transaction fees, balance transfer fees, higher late payment fees, etc.
Is It Better to Have a Secured Credit Card or an Unsecured Credit Card if I Want to Build My Credit?
The answer to this question depends on the state of your credit.
If you have bad credit, negative remarks on your credit history, or do not yet have any credit, then a secured credit card is one of your best tools for building your credit.
But that doesn’t mean a secured credit card is the right choice for everyone.
A credit builder loan (secured personal loan) for instance might be the better choice to start with. There is zero temptation to overspend, and a loan can’t be stolen from your wallet.
If you already have good credit then an unsecured credit card will likely be the better choice in helping you build credit. With lower interest rates and fewer fees, this type of card will help you keep your revolving debt in check.
Just make sure you qualify for the card before you apply because a credit pull with a rejection will only hurt your credit score. Also look at our Secured vs. Unsecured Credit Cards to compare the two more in depth.
Should Your First Credit Card Be Secured or Unsecured?
If you are brand new to credit, then starting with a secured credit card might be your best bet.
In part, this is because you are much more likely to qualify for a secured credit card when you are first starting out.
Another good reason for starting with a secured credit card is that the use of a security deposit combined with a low credit limit can help teach you how to manage credit and your finances in a safe way.
Knowing nothing about credit and starting with an unsecured card with a $3000 limit could be a recipe for disaster.
Starting with an unsecured card can still be worthwhile, especially if the card is geared towards those just starting out with credit. For instance, a student card usually comes with a low credit limit and restrictions on use to help prevent those new to credit from winding up in debt.
Or if you are credit-wise, and/or have experience as an authorized user on someone else’s credit card account, then maybe jumping straight to an unsecured credit card will be fine. And you can enjoy lower interest rates and better perks from the beginning. (Take a look at our list of Best Secured Credit Cards to Build Credit.)
My Personal Viewpoint
I’m not going to lie, when I first started my credit journey, I didn’t even know what the term “secured” meant, let alone that there were secured credit cards out there.
I immediately jumped to applying for unsecured credit cards and received several rejections without knowing that this could further damage my fledgling credit score and make it even harder to get approval.
Luckily, one lender decided to take a chance on me, and after many years of trial and error in learning how to properly manage my finances, I was able to build a pretty good credit score.
But if I could do it all over again, I might have started with a secured card. I wouldn’t have risked those rejections and that lower credit limit could have helped me learn about managing credit card debt properly with much less risk.
So, moral of the story, do your research and know what kind of credit product you are getting before signing that application.
Amanda Garland is a personal finance blogger living in Dallas, TX. 10 years ago she was living paycheck to paycheck and knew nothing about how credit works. She learned some hard lessons in her fight for financial stability. Now she has a friendly competition going with her husband to see who can reach a credit score of 850 first. She is also a poet, having obtained a Bachelor of Fine Arts degree in Creative Writing.