Secured vs. Unsecured Credit Cards: What's the Difference?

For one, the secured card requires a deposit.

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If you have bad or no credit, a secured credit card, used 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 before you decide to apply for a secured credit card.

What Is a Secured Credit Card?

Unlike regular credit cards, a secured credit card requires 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, since secured card applicants typically have little or no credit, or are rebuilding bad credit, they are considered risky. In most cases, if you open a secured card, the amount you deposit will be the amount of the card’s credit limit, typically $200-$2,000, depending 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, and 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 may tack on application processing or monthly maintenance fees. All of these are on top of the normal line-up of penalty and transaction fees regular credit cards may charge.

Secured card fees will show up as charges on your card, incurring interest, and reducing the amount of available credit. Pay them off just as you would any other purchase on your card—as quickly as you can. 

Unlike debit and prepaid cards, secured card accounts are usually reported to the major credit bureaus, which is how these cards influence your credit history. However, even though they are a tool for building credit, not all secured cards are reported to the major credit 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.

Secured vs. Unsecured Credit Cards: What Are the Differences?

Outside of the deposit and possible other fees, secured cards are supported by major card networks like Visa and Mastercard and can be used like regular, unsecured cards. You know all those advertisements for travel and rewards credit cards? Those are for unsecured cards even though they aren’t outright called “unsecured.” These more traditional cards account for most consumer credit cards on the market today. 

Besides the deposit requirement, there are other differences between these two types of credit card.

Unsecured Cards Can Have Lower APRs and Fewer Fees

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 close to or above 25%, compared to the current national average credit card APR of 16.91%. 

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. 

Unsecured Card Credit Limit, APR, and Application Approval Is Based on Credit Check

When you apply for an unsecured credit card, the issuing bank will always perform a credit check. They’ll use your credit score, repayment history, and other factors such as amount of existing debt to not only determine 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, because in many cases, a secured card’s deposit and fees are enough for the bank to establish your account. 

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 credit worthiness. Secured card credit limits are based on the size of the deposit made to secure the account. Unsecured card credit limits are based on creditworthiness and can be thousands of dollars higher than what you actually spend each month. 

Issuers Consistently Report Unsecured Card Accounts and Activity to Credit Bureaus

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. 

Unsecured Cards Offer Rewards 

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.

Comparing Secured and Unsecured Credit Cards
Joshua Seong © The Balance 2019.

Secured vs. Unsecured Credit Cards: What Are the Benefits?

There are benefits to both secured and unsecured cards, depending on what you need or want from a credit card. 

Secured Cards Benefits

  • Even those with bad credit can qualify: For those who need a way to get back on their feet, secured cards have few approval qualifications. 
  • Can help you build a good credit history: If you are new to credit cards, secured cards offer a deposit-protected and structured environment to build upon. 
  • Deposit is refundable: While paying a deposit to get a credit card isn’t convenient, as long as you keep your account in good standing and pay off your balances, you’ll get your initial deposit back. 

Unsecured Cards Benefits

  • Lower interest rates and fewer fees: Those with an established credit history and good-to-excellent credit scores can access cards that cost less over time than secured cards.
  • Access to rewards programs: Large purchases and everyday expenses can actually earn you money back if rewards cards are used strategically
  • More cards to choose from: There are many more options and types of unsecured cards than secured cards. Whether you are looking for a card with low interest, rewards, balance transfer deals, or excellent travel benefits, you’ll have options. 
  • Higher credit limits: With better credit comes a higher credit limit. This can help you fund large purchases without maxing out the card or hurting your 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.

Secured vs. Unsecured Credit Cards: What Are the Drawbacks?

All credit cards should be used responsibly and applicants should read the terms and conditions carefully before opening an account. 

Secured Cards Drawbacks

  • Deposit requirements: A deposit of a few hundred dollars is a large one-time payment that could throw off an already tight budget. It’s refundable, but not necessarily convenient. 
  • Excessive fees: On top of the deposit, secured cardholders may face non-refundable fees such as annual fees, monthly maintenance charges, and even application processing fees.
  • Low credit limits: Since secured card deposits typically become the card’s credit limit, if you can’t put down a couple thousand dollars, you won’t have a large credit limit. That means it’ll be even more important to watch your spending so your debt to available credit ratio doesn’t rise too high. 
  • Few to no rewards: Secured cards will cost you and you likely won’t get anything in return outside of the credit history and practice using credit wisely. 
  • Not all issuing banks report accounts to credit bureaus: This is a big one. If you have a secured card to improve your credit score and history, the account needs to be reported to the bureaus. Since this isn’t a given with secured cards, you’ll need to check to make sure before applying. 

Unsecured Cards Drawbacks

  • Approval qualifications vary: Depending on the card, credit score requirements will vary. Even if you have been a responsible cardholder, you might not qualify for the very best rewards card. You’ll need to do some research to find a card that fits your needs and your credit score. 

When Should You Get a Secured Card?

If you’ve never had a credit card before, have a bad credit score, or recently filed for bankruptcy, a secured card may be a good tool for you. However, because secured cards require a deposit and come with extra fees, make sure your budget can support the extra costs before you apply. 

You should also only get a secured card if you can afford to pay your card balance off in full, on time, every month. To build or rebuild your credit, you need to demonstrate that you are a responsible cardholder. The amount you owe and your payment history are the two largest factors impacting your FICO credit score, after all. 

Speaking of credit reports, if a secured card seems right for you, find one that reports to all three credit bureaus. All that effort to improve your won’t make a difference if the secured card account history doesn’t appear on your credit report. 

How to Apply for a Secured Card

To start reviewing current secured card offers, check out the top secured cards ranked by The Balance. 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, too. 

How to Upgrade to an Unsecured Card

If you’re not eligible for an unsecured card now, spend the year 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 and when it reaches the mid-600s and a year of smart credit card use is 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.