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

Credit Cards

Whether you are looking to get your first credit card or working to rebuild your credit, choosing the right credit card is essential. Making the best choice for your situation starts with understanding exactly what secured and unsecured credit cards are.

credit card smartphone

Let’s dive into the differences between secured and unsecured credit cards to determine which is best for your situation.

What’s the difference between secured and unsecured credit cards?

It may seem like all credit cards are created equally. However, that is not the case.

Unsecured credit cards

An unsecured credit card has no collateral associated with your spending limit. Without any collateral, your card is termed “unsecured.”

With an unsecured card, your spending limit is determined based on your overall credit risk to the lender. The lender will use factors such as your credit score, credit report, income, and payment history to determine your credit limit.

Most credit cards you see on the market today are unsecured cards. If you were unable to pay off your unsecured card, then the lender would have no recourse other than persistent collection efforts. This might include reporting your outstanding balance to the three major credit bureaus, suing you, finding a legal way to garnish your wages, or passing your outstanding debt along to a third-party collection agency.

Secured credit cards

A secured credit card is backed by a security deposit that you are required to put down. The cash deposit acts as collateral against your credit card spending, so it is more of a “secure” loan for the lender.

With a secured card, your spending limit is determined by the amount of your security deposit. If you want to increase your credit limit, you will be required to put down a larger deposit. In some cases, the lender may increase your credit limit without requiring a larger deposit if you maintain a solid payment history.

You have more limited secured card options in today’s market. However, they are easily distinguished because they usually have “secured” in the name.

What is the best choice for you?

Both types of cards have merit, but which is best for you?

Benefits of Secured Credit Cards

If you have little or no credit history, then a secured card can be a way to build credit. When used wisely, all credit cards can help you build credit. However, it can be easier to stay on track with a secured card if you are just starting out. Take steps like charging small amounts, paying your bill on time, and keeping your credit usage low to watch your credit grow.

When you have bad credit, the secured credit card options offer a way to secure a line of credit to rebuild your credit score. Especially because with bad credit, the unsecured card options you have available may come with high fees or interest rates.

Unlike unsecured cards, your credit limit is based on what you can afford to put down as a security deposit. With a secured card, it can be easier to live within your means and avoid the pitfalls of debt.

If you struggle with using credit or have a poor credit history, then you should find a secured credit card to work with. After you rebuild your credit, you may be able to upgrade to an unsecured card to take advantage of the lower interest rates and rewards programs.

What to look for in a secured credit card

If you want your secured card to help you rebuild your credit, then you need to choose your card carefully. Typically, there’s an annual fee involved with secured credit cards, which can take up a large part of your available credit. You need to find a card with low fees.

Also, you need to ensure that the provider is properly reporting your credit card activity to a credit agency. Otherwise, your credit will not improve.

Benefits of Unsecured Credit Cards

The most attractive benefit of an unsecured credit card is that you will not have to put down money to open the account. You may have other plans for that money instead of a secured credit card deposit like a high yield savings account or starting your retirement savings.

Unsecured cards usually offer lower interest rates than secured credit cards.

Plus, unsecured cards typically offer rewards programs that can be worthwhile. Secured cards rarely offer rewards. You can often find a rewards program to suit your interests like travel miles, cash back, and more.

If you have a solid credit score and are comfortable using credit, then you should move forward with an unsecured credit card.

Bottom Line

Secured credit cards are a good way to build, or rebuild, your credit score because they offer the chance to practice good credit habits backed by your security deposit.

However, if you already have a handle on effectively using your credit, then an unsecured card may be a better choice. With an unsecured card, you can take advantage of better rewards programs with lower expenses.

If you aren’t sure where you stand in terms of credit, then find out more here.

Sarah Sharkey
Meet the author

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing.