We recommend products that we love. When you buy through links on our site, we may earn an affiliate commission.
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.