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 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’re unable to pay off your unsecured card, then the credit card issuer has 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 refundable security deposit that you are required to put down. The cash deposit acts as collateral against your credit card account, so it is more of a “secure” loan for the card issuer.

With a secured card, your spending limit is determined by the amount of your initial security deposit. If you want a higher 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.

With both types of credit card, you need to make at least the minimum monthly payment to avoid late fees and late payments on your credit report. For secured cards, the credit card issuer won’t take your minimum payment out of your deposit if you miss it.

Which is better: a secured or unsecured card?

Both types of credit 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 may be your only option. Secured cards can be an excellent way to build credit. When used wisely, all credit cards can help you build credit history.

However, it can be easier to stay on track with a secured card if you are just starting out. To make the most of it, try charging small amounts and paying your credit card bill on time. Additionally, keep your credit usage low to improve your credit score.

Secured credit cards can also be a viable option for rebuilding credit if you have a low credit score. These cards often have more lenient approval requirements than unsecured cards, which may be necessary if you have a bad credit score and can’t qualify for other types of credit cards.

Additionally, secured cards may have lower fees and rates than unsecured cards that are available to you with bad credit.

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 card to work with. After you improve your credit scores, 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 score, then you need to choose your card carefully. Typically, there’s an annual fee involved with a secured credit card, which can take up a large part of your available credit. You need to find a secured credit card with low fees.

Furthermore, you must ensure that the credit card company is properly reporting your credit card payments to the credit bureaus. Otherwise, your credit scores 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 security 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.

Best Secured Credit Cards of 2023

Chime Credit Builder Secured Visa® Credit Card

This credit card from Chime is one of the first of its kind. It’s also our top choice for the best secured credit card available.

Typically, banks have a set amount that you must deposit to open the account. However, there is no minimum security deposit required with this card. There’s also no annual fee or interest.

All you need to apply is a Chime Checking Account and qualifying direct deposits of $200 or more. The checking account takes two minutes and there is no credit check to apply. Chime reports your payment history to all three major credit bureaus.

Discover it® Secured Credit Card

You’ll likely have a low credit limit with this secured credit card. However, you can earn 2% back on your first $1,000 in combined gas station and restaurant purchases each quarter plus 1% back on all other purchases. That’s a pretty sweat deal for a no-fee card, let alone a secured card.

Like other secured credit cards, Discover it® Secured card also reports to all three credit bureaus so you can build your credit over time. It comes with no annual fee, no hidden fees, and the potential to earn rewards on your spending. Keep in mind, however, that the interest rate on this card is a 24.99% variable rate.

Capital One® Platinum Secured Credit Card

Another solid choice is the Platinum Secured from Capital One®. This card also comes without an annual fee. However, the initial credit line (and corresponding security deposit) is only up to $200.

Capital One may give you a higher credit limit after five months of on-time payments.

These secured credit cards are a few of the best, but there are plenty of other cards to consider. As you search among card offerings, make sure to look for secured credit cards that feature:

  • No fees or extremely low fees
  • Added perks like access to your FICO score
  • The chance to raise your credit limit over time
  • Reporting to Experian, Equifax, and TransUnion

Secured vs. Unsecured Credit Cards FAQs

What is the minimum credit score for an unsecured credit card?

Most unsecured credit cards require credit in the good to excellent range, which is 670-850. This range is where you’ll be eligible for the best credit cards available that come with the best rewards, features, and benefits.

However, it’s also possible to find some credit cards that will accept a score in the fair to good range, which is 580-669.

What is the minimum credit score for a secured credit card?

There is no minimum credit score needed for secured credit cards. They are designed for people with bad credit, limited credit, or no credit.

Should I pay my secured credit card in full?

It’s wise to pay the entire balance in full each month. Secured credit cards tend to charge high interest rates, so carrying a balance from month to month can be costly. Plus, paying it in full each month with lower your credit utilization ratio, which is a factor of your credit score.

Do secured cards build credit faster?

Whether a credit card is secured or unsecured doesn’t have any impact on your credit scores. However, since unsecured credit cards generally come with a higher credit limit, they are better for your credit.

How do I change my secured credit card to unsecured?

Once you’ve improved your credit scores with a secured credit card, you can apply for an unsecured credit card that can qualify for.

After you’re approved for the new credit card and your account is open, pay off any remaining balance on the secured card, close it, and get your security deposit back. With some banks and credit unions, it may also be possible to convert your secured card account to an unsecured account.

Do secured and unsecured credit cards have the same rewards?

No, secured credit cards typically do not have the same rewards as unsecured credit cards. However, some secured cards may offer limited rewards programs, such as cash back or points for certain types of purchases.

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.