The difference between secured and unsecured credit cards

Credit cards are almost as common as cellphones these days. According to the Federal Reserve, 83% of adults had at least one credit card in 2020.

And just like cellphones, credit cards can be convenient. If you need to buy something but don’t have the cash, you can charge it to your card instead. The right card could even pay you back with miles, points or cash.

Credit cards aren’t all alike, though. Whether you have a secured credit card or an unsecured credit card matters.

So what is the difference between secured and unsecured credit cards? Here’s a closer look at how they compare.

What is a secured credit card?

A secured credit card is a credit card that requires collateral to open. This collateral usually takes the form of a cash deposit, which is equal to your credit limit.

If you open a secured credit card that requires a $250 deposit, you’d have a $250 credit line. Some cards may require a smaller deposit that isn’t tied to your credit limit. Whether a deposit for a secured credit card is refundable or not can depend on the card issuer.

Secured credit cards are often marketed to people who have bad credit or no credit at all. And if you’re a student, you may not have a credit score yet if you haven’t had any debts in your name.

How do secured credit cards work?

Secured credit cards work like unsecured credit cards for the most part, with the exception of the initial deposit.

For example, say you open a secured credit and deposit $200 with the credit card company. You then have a $200 credit limit. As you make purchases, your available credit is reduced. As you make payments toward the balance you free up available credit.

If you carry a balance month to month, you’ll likely pay interest. You might also pay an annual fee, which is common with secured credit cards.

Secured credit cards can report your account activity, including balances and payments, to the credit bureaus. Some cards allow you to upgrade to an unsecured card after six months or more of positive payment history.

What is an unsecured credit card?

Unsecured credit cards don’t require a collateral or deposit to open. The majority of credit cards, including some of the top rewards cards, are unsecured.

The credit limit you qualify for with an unsecured credit card isn’t based on your deposit. Instead, it’s based on your credit history and credit scores.

Unsecured credit cards can be marketed to different people, depending on their credit ratings. So, for example, there are unsecured credit cards for fair credit, credit cards for good credit and unsecured cards for excellent credit.

The type of card you qualify for can influence the interest rates and fees you’ll pay. It can also determine what type of rewards, features and benefits you’ll have access to as a cardmember.

How do unsecured credit cards work?

Unsecured credit cards are a type of revolving credit, in which you charge payments to the card and then pay it off at a later date. If you choose to carry a balance month to month, you might pay interest on purchases.

Making purchases reduces your available credit; making payments can increase it. Whether you earn rewards on purchases can depend on the type of card you have. Unsecured cards can offer miles, points or cash back.

You may pay an annual fee for an unsecured credit card. Generally, the better the rewards or card benefits the higher the fee.

The difference between secured and unsecured credit cards

Both secured and unsecured cards can be used to make purchases or build credit. Taking a closer look at the difference between secured and unsecured credit cards can help you decide which one might be right for you.

• Deposit: Secured credit cards require a deposit while unsecured cards don’t.
• Credit limits: Unsecured cards may offer higher limits than secured credit cards.
• Cost: Secured cards may charge higher interest rates than unsecured credit cards.
• Rewards: You’re more likely to find unsecured cards that offer rewards programs versus secured cards.
• Features: Unsecured cards may also have more features and benefits, compared to secured cards.
• Approval: It may be easier to get approved for a secured credit card than an unsecured card if you have bad credit or no credit.

So what’s better, secured or unsecured credit cards?

Using a secured card could make sense if you have limited or no credit history or bad credit. You might be able to use one of these cards as a stepping stone to an unsecured card if you’re building good credit history.

On the other hand, if you have fair, good or excellent credit you’re likely better off with an unsecured credit card. The higher your credit score, the broader the pool of cards you’ll have to choose from. You may not escape annual fees or interest, but earning better rewards or unlocking perks like airport lounge access or travel credits can help make up for it.

Pros and cons of secured and unsecured credit cards

Bottom line

Secured credit cards can help you get bad credit back on track or start building credit for the first time. Meanwhile, unsecured cards offer convenience and the potential to earn rewards, without requiring a security deposit. Checking your credit scores can give you an idea of which type of card you’re likely to qualify for. From there, you can compare options for secured credit cards or unsecured credit cards to find the best card for your needs and spending habits.