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How To Compare Secured Vs Unsecured Credit Cards

Molly Grace5-Minute Read
July 24, 2021

It can be tricky to get your foot in the door of the world of credit.

Credit cards can be a great tool for establishing and building a good credit score. But to get a credit card, you need to qualify for one – which can be hard if you don’t already have a credit score, or if your current score is low.

Enter secured credit cards, an option for individuals who want to start building their credit, but aren’t able to qualify for traditional, unsecured credit cards.

When should you apply for a secured vs. unsecured credit card? Let’s go over the basics of these two credit options.

Secured Credit Card Vs. Unsecured Credit Card: What’s The Difference?

The key difference between secured and unsecured cards is a security deposit.

Secured credit cards require users to make a deposit in order to use the card. With unsecured cards, users don’t need to make a deposit; they receive a line of credit based on their creditworthiness and can borrow against their credit line without having to put their own money down.

Secured and unsecured cards also typically differ in their credit requirements, interest rates and credit limits.

What Is A Secured Credit Card?

As the name suggests, secured credit cards are a type of secured debt. With this type of debt, you offer some sort of collateral in exchange for the money you borrow, lowering the risk to the creditor.

Auto loans are another type of secured debt. If you aren’t able to make your monthly auto loan payments, your lender can repossess your car to recoup some of their loss.

When you get a secured credit card, the credit card issuer will have you pay a refundable security deposit. This is what “secures” the card and makes it so that even those with no or poor credit can get a credit card.

Your deposit will act as your credit line. This takes away the risk from the credit card issuer, since you’re essentially borrowing from your own security deposit. Deposit amounts typically start at $200, but it depends on the card. You may be able to pay a larger deposit to get a higher credit limit.

Once you make your deposit and receive your card, you can start using it like any other credit card. You can make purchases with it, borrowing up to your credit limit. Each month, you’ll receive a statement that shows all the purchases you’ve made and the minimum amount you need to pay that billing cycle.

Your credit card issuer will report information about your account to the three major credit bureaus, which is what allows you to build credit and why it’s so important that you make your payments on time each month and keep your credit utilization ratio low.

As you make on-time payments and follow the terms of your card, you’ll likely see your credit score begin to grow. Eventually, you may be able to qualify for a regular, unsecured credit card.

Some secured cards come with this option built in, where your credit card issuer will review your account after a certain amount of time to see if you qualify to have your card converted into an unsecured card. When this happens, your security deposit will be refunded.

It’s important to keep in mind that a secured card comes with the same responsibilities as an unsecured card. Failing to make timely payments will likely hurt your credit score and lead to you losing your security deposit.

What Is An Unsecured Credit Card?

Unsecured credit cards are probably what you think of when you picture a “regular” credit card.

The term “unsecured” refers to the fact that these cards don’t require any type of collateral, such as a security deposit, to lessen the lender’s risk. Other types of unsecured debt include things like personal loans and student loans.

Because you aren’t providing any collateral, you’ll need to have a fair or good credit score to qualify for most unsecured cards. The credit card issuer won’t require you to make a deposit; instead, they’ll look at your credit score and credit history to determine your creditworthiness.

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How Do Secured Vs. Unsecured Credit Cards Compare?

Let’s take a look at some of the differences you’ll typically find with secured vs. unsecured cards.

Keep in mind, though, that every card has its own nuances and quirks. It’s important to understand all the features, benefits and terms of each individual card you’re considering, regardless of whether it’s secured or unsecured.

Credit Checks And Credit History

Most credit cards, both secured and unsecured, require a credit check.

The credit card issuer will look at your credit history and your score to see if you qualify for the card you’ve applied for. If you’ve applied for a secured card, they might not pay as much attention to your credit score, but may look for any significant red flags, such as a recent bankruptcy.

With an unsecured card, you’ll likely need to have a good credit score in addition to a blemish-free recent credit history. Some unsecured cards may approve users with lower than average scores or a somewhat spotty credit history, but these can be expensive, with high APRs and high annual fees.

Credit Limits

Your credit limit on a secured card is typically equal to your security deposit.

With unsecured cards, your credit limit is based on your creditworthiness and your ability to repay the amount you’re borrowing. When you apply for an unsecured card, the credit card issuer will likely take your income, expenses and debt-to-income ratio into account to determine what credit limit you can reasonably afford. This means you may qualify for a higher credit limit on an unsecured card than what you’d get with a secured card.

Credit Card Fees

Both secured and unsecured cards can come with different fees. How much you’ll pay will depend on the specifics of the card.

Some cards come with an annual fee. This usually applies when the card has more benefits than the typical, no-annual-fee card. For example, a secured card might come with an annual fee if it allows users to skip a credit check when they apply for the card. An unsecured card might have an annual fee if it offers attractive rewards, such as a cash-back or travel perks program.

Other fees you might run into include things like balance transfer fees or late payment fees.

Interest Rates

If you carry a balance on your card from month to month, you’ll pay interest on that amount.

Your interest rate – shown as your “APR,” or annual percentage rate – on an unsecured card will usually depend on a few different factors. Credit card issuers will typically list an APR range for unsecured cards. The exact rate you’ll get will depend on external market factors as well as your own creditworthiness.

Secured cards typically come with one variable rate that applies to all users, and this rate may be higher than what you’d get on an unsecured card.

Credit Card Rewards

Though there are a few secured cards that offer cash-back rewards, if you want access to the best rewards, you’ll need to apply for an unsecured card.

Cash-back rewards cards offer a percentage of cash back on purchases you make, up to a certain amount. Other types of rewards that credit cards might offer include points-based rewards programs where points can be redeemed for rewards or miles-based rewards programs for frequent travelers.

Which Types Of Card Is Right For Me?

  • Who secured cards are best for. If you’re just getting started building or rebuilding your credit, your options for credit cards will likely be limited. A secured card allows you to work on boosting your credit score so you can get to a point where you qualify for an unsecured card.
  • Who unsecured cards are best for. Unsecured cards tend to be more advantageous overall, if you can qualify for one. Every card has different requirements; some of the best cards will only approve applicants with good or excellent credit scores, though there are also plenty of good cards aimed at those with average credit.

These are general guidelines, but the best card for you is the one that best suits your needs. If you have a lower credit score, you may find unsecured cards you’re able to qualify for, but they might come with so many fees and such a high rate that it’s actually better to opt for a secured card.

As you consider different cards, be sure to look at the full picture, not just which one requires a deposit or which one offers the largest cash-back benefit.

The Bottom Line: Choose A Credit Card Based On Your Needs

Ultimately, it’s going to come down to what you can qualify for. Unsecured cards tend to have better interest rates, higher credit limits and more attractive rewards, but not everyone can access an unsecured credit card right away. Or, if they can, the ones they qualify for might be expensive to maintain with few benefits.

Though they have their limits, secured credit cards are a great option for those looking to build their credit. Just be sure to make your payments on time, keep your credit utilization low and, if you can, pay your bill in full each month to avoid incurring interest. As long as you use your secured credit card responsibly (and make on-time payments for any other debt you have), you’ll be well on your way to building a solid credit history.

Want more credit card advice or financial tips? Check out the Rocket HQSM Financial Learning Center.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.