If you have bad or no credit, using a secured credit card wisely can help you build a positive credit history. Secured cards are similar in many ways to regular, unsecured credit cards. The major difference between the two is that the secured card requires a deposit—that’s what makes it “secured”—while the unsecured card does not.
But that’s not the only difference you should be aware of when deciding which type of card is right for you.
What's the Difference Between a Secured and Unsecured Credit Card?
|Secured Credit Card||Unsecured Credit Card|
|Qualify with bad or no credit (and a deposit)||Qualify with good FICO score and credit history|
|High interest rates||Lower interest rates|
|Few rewards||Lots of rewards|
|Extra fees||Few (or avoidable) fees|
|Almost always labeled "secured"||Not clearly labeled as "unsecured"|
|Low credit limit||Credit limit based on creditworthiness|
|Some don't require a credit check||Credit check required|
Unlike regular credit cards, secured credit cards require a one-time, refundable deposit before you are approved for the card. That secured card deposit is held by the bank to cover purchases made with the card in case the cardholder stops making payments on the account. Think of it as an insurance policy for the bank.
In most cases, if you open a secured card, the amount you deposit will be the amount of the card’s credit limit, typically between $200 and $2,000. It depends on minimum deposit requirements and how much extra you add on top.
Secured card deposits don’t cover your monthly credit card bill. You’ll need to pay the bill on time each month. If you don’t pay the bill in full, you’ll incur interest charges, which are often higher than average credit card interest rates. Your deposit will be refunded once you’ve proved your creditworthiness by keeping the account in good standing or when you close the account.
Some secured cards also charge an annual fee, and they may tack on application processing or monthly maintenance fees. All of these are on top of the normal lineup of penalty and transaction fees regular credit cards may charge.
Learn some of the other differences between these two types of credit cards.
When you apply for an unsecured credit card, the issuing bank will always perform a credit check. They’ll consider your credit score, repayment history, and other factors, such as your amount of existing debt. This will not only determine your approval but also your credit limit and interest rate.
Secured cards don’t have minimum credit score requirements, and some issuers won’t even perform a formal credit check. You may see these cards advertised as “guaranteed approval” cards. In many cases, a secured card’s deposit and fees are enough for the bank to establish your account.
Fees and APRs
Annual percentage rates (APRs) vary greatly among all credit cards, but unsecured APRs are typically lower than the rates of secured cards. Just as secured cards require deposits, the higher APRs attached to secured cards act as an insurance policy for the bank. If you qualify for a secured credit card, your interest rate will likely be closer to 25%, compared to the current national average credit card APR of 16.28% in 2020.
Secured card APRs are often the same for all approved applicants. Meanwhile, many unsecured credit card issuers award variable interest rates based on the applicant’s creditworthiness. Secured card credit limits are based on the size of the deposit made to secure the account. Unsecured credit limits are based on creditworthiness and can be thousands of dollars higher than what you actually spend each month.
Those with better credit scores and positive credit histories can also qualify for better interest rates with most unsecured credit cards. There are also unsecured cards that offer promotional, limited-time 0% APR deals to qualified new card applicants.
Monthly maintenance fees are unheard of with unsecured cards, and those with annual fees are often easily offset by rewards. People who don’t want to pay annual fees at all can find such unsecured cards, too.
Secured card fees will show up as charges on your card. This will incur interest and reduce the amount of available credit. Pay them off just as you would any other purchase on your card—as quickly as you can.
If you have an unsecured credit card in your wallet, that account information is on your credit report. Unsecured credit card issuers regularly report your card activity to one or more of the three major credit bureaus: Experian, Equifax, and TransUnion. This information will impact your credit history and FICO credit score accordingly.
However, not all secured credit card issuers report accounts to the credit bureaus. Those who qualify for a secured card but need that positive credit history on their record will need to make sure they apply for an account that reports those important details to the bureaus.
If you’re considering a secured credit card to help build (or rebuild) your credit, make sure the issuer reports cardholder activity to at least one of the three major credit bureaus. If they aren’t, you’re just signing up for a bad credit card.
Few secured cards offer rewards. Secured cards are designed to help holders make purchases to build a credit history. Unsecured credit cards, on the other hand, are often designed to attract consumers with a wide range of rewards, such as cash back, limited-time 0% APR offers, and points or miles for travel. Big spenders and those with excellent credit can apply for cards that reward those qualities with even more rewards and perks, too.
Which Is Right for You?
A secured credit card may be right for you if you have bad credit or need to build up your credit history. For those who need a way to get back on their feet, secured cards have few approval qualifications. If you are new to credit cards, secured cards offer a deposit-protected and structured environment to build upon.
And if you're worried about that initial deposit, you'll often get it back eventually—as long as you keep your account in good standing and pay off your balances.
An unsecured credit card might be right for you if you have an established credit history and good-to-excellent credit score. You will have access to lower interest rates and fewer fees, as well as rewards programs. There are many more options when it comes to unsecured cards, so whether you are looking for a card with low interest rates, rewards, balance transfer deals, or excellent travel benefits, you’ll have options. You'll also have a higher credit limit and may be less likely to hurt your credit utilization ratio.
Credit utilization ratio is the amount of total available credit you have used, expressed as a percentage. For example, suppose you have a card with a credit limit of $10,000 and on which you have a balance of $2,500. The utilization ratio for that account is 25%. (Ratios below 30% are preferred.) Utilization ratio is a key factor in calculating a credit score.
How to Apply for a Secured Card
Just like unsecured credit cards, you can apply for secured cards online. You’ll have to provide many of the same application details, too: name and contact information, financial details like your income, and permission to perform a credit check, if applicable.
Be prepared to disclose bank account and routing numbers to fund your deposit and other application fees, if necessary.
A Best-of-Both-Worlds Option
If you’re not eligible for an unsecured card now, spend some time building a good credit history with a secured card, and don’t overspend. Only charge what you can afford to pay off each month, on time. If you have additional debts or past due balances elsewhere, straighten out those accounts during this time, too.
After several months of responsible secured card use, your secured card issuer may automatically convert your account to an unsecured card and refund your deposit. If not, keep an eye on your credit score. After you have a year of smart credit card use under your belt, contact your secured card issuer and ask if they can graduate you to an unsecured card.
If you don’t want to get an unsecured card from the same issuer, assess your spending habits, credit card needs, and your FICO score to see what your unsecured options are elsewhere. Once you find an unsecured card, apply before closing your secured card to reap the benefits of the open account that’s in good standing.
The Bottom Line
There are benefits to both secured and unsecured cards, depending on what you need or want from a credit card.
A secured credit card may be the best option for someone who is working to build or rebuild their credit history, though this type of card requires an upfront deposit and may not come with a lot of perks.
An unsecured credit card, on the other hand, is the typical credit card you likely see advertisements for, even though they don't explicitly say "unsecured." These cards can come with rewards, but they may be more difficult to qualify for if you don't have a high credit score. Even if you start out with a secured credit card, paying your balance on time and keeping your account in good standing can help you get upgraded to an unsecured card.