Secured vs. Unsecured Credit Cards
By Michelle L. Black
Reviewed by Lauren Bringle, AFC®
When you research potential ways to improve your credit, advice about opening a new credit card will probably be near the top of the list.
Before you rush to fill out a new credit card application, it’s wise to do some research and make a plan. There are multiple credit card options available. If you don’t choose the best option for your situation, you could experience a credit score setback instead of an improvement.
Credit cards come in two different varieties—secured and unsecured. Below is a breakdown of each of these credit card options and some information on how to choose the best credit card type for your situation.
What is the difference between a secured credit card and an unsecured credit card?
Looking at a credit card, there’s no way to tell a secured credit card and an unsecured card apart. In fact, you can’t even spot the difference between a secured and an unsecured credit card on a credit report.
Where these two types of accounts differ is in the process, you go through when you open your credit card.
- Secured credit cards, like secured loans, require you to put up collateral when you open the account. With secured credit cards, you make a security deposit with the issuing bank or financial institution. That security deposit is refundable. Your refundable security deposit is often equal to the size of your credit limit on the account (i.e., a $500 security deposit gets you a $500 credit limit). However, some card issuers will give you additional room in your credit line—a partially unsecured credit limit, if you will—above and beyond the security deposit you supply.
- Unsecured credit cards do not require a deposit when you open the account. Instead, the issuing bank loans you funds without asking you to put up any collateral on your end. But the bank will run a credit check and will use data about your income and credit history to determine whether to let you open an account, as well as the credit limit and other terms.
In addition to the differences outlined above, it’s also common for secured credit cards to feature higher annual percentage rates
(APRs) and fees than unsecured credit cards. Meanwhile, unsecured credit cards may boast higher credit limit possibilities than secured credit cards. Finally, while a few secured credit cards may allow you to earn rewards, most reward credit cards are unsecured accounts.
Aside from the requirement of a security deposit or lack thereof, secured cards and unsecured cards are almost the same. With either type of account, you can charge up to your credit limit, and then you must repay at least the minimum payment by the due date on your statement. Of course, the best way to manage any credit card
is to pay your statement balance in full by the due date to avoid paying interest on the account.
Why consider a secured credit card?
Why consider a secured credit card?
Since an unsecured credit card offers you the opportunity to open an account without putting up any collateral, you might wonder why you would consider a secured credit card. The primary reason people consider secured credit cards is because they may be easier to qualify for in certain credit situations.
So, if you fit into any of the following categories, you might want to think about starting with a secured credit card to establish or rebuild your credit rating.
- New to credit: As a credit newbie, some lenders may feel nervous about doing business with you. A secured credit card can give you a chance to build credit from scratch, establish positive credit history, and show future lenders that you’re a good credit risk.
- Damaged credit history: Even with a bad credit score, there’s a decent chance you may qualify for a secured credit card. By supplying collateral, you reduce the risk involved for the issuing bank.
- Denied for unsecured credit: If you’ve applied for an unsecured credit card in the past and the lender has denied you, a secured card might be a better fit for now. Manage your account well, and it could be a bridge to better credit card options at a later date.
- Unable to qualify for a higher credit limit: If your credit score or debt-to-income ratio keeps you from qualifying for a sizable credit limit, a secured card might benefit you. With a secured card, you can put down as much money as you want—up to the lender’s maximum. This system gives you more control over the size of your regular credit card limit. Remember, a higher credit limit may make it easier to maintain a low balance-to-limit ratio (credit utilization rate).
See related: Can you rent a car with a car secured credit card
Can I build credit with a secured credit card?
What are the benefits of a secured credit card?
Well, the best feature of secured credit cards is the fact that they have the potential to help you build credit just as effectively as unsecured cards. So, you might ask, “how much will a secured credit card raise my score?
” The amount it will increase your credit score varies, but for a secured credit card to help you build credit, you have to follow two important rules.
- Make every payment on time. Late payments on a secured credit card can defeat the purpose of opening the account to work on improving your poor credit. Payment history is the most essential component of your credit score. So, if you want to build credit with your new secured card, you must commit to keeping every single payment of credit card debt on time.
Tip: Consider setting up an automatic payment for the minimum amount due on your account each month. If you accidentally forget to pay the card by its due date, the automatic draft can serve as a backup to protect you.
- Maintain a low credit utilization rate. FICO and VantageScore credit scoring models base a significant portion of your credit score on the relationship between your credit card limits and balances. Your credit score can benefit when you keep this relationship—aka your revolving utilization ratio—at a low level. However, charge up a high balance relative to your credit limit and your credit score may decline.
Tip: There are several ways to maintain a low credit utilization rate. You could try paying your balance before the statement closing date each month, paying your bill multiple times throughout the month, or never letting your card balance climb above a certain level (i.e., less than 30% of your credit limit).
Which credit card will help me improve my credit the most?
Any type of credit card could help you improve your credit rating under the right set of circumstances. The benefits of opening a credit card include the potential to build positive payment history, an improved credit mix, a “thicker” credit file, and more.
There’s no advantage—at least not from a credit score perspective—to opening a secured vs. unsecured credit card. However, before you choose the credit card that’s right for you, there are a few factors to keep in mind.
- Make sure the credit card issuer reports to all three credit reporting agencies. Most major credit card issuers or a financial institution will share your account information with Equifax, TransUnion, and Experian each month. But this isn’t a universal rule. So if you’re concerned about working on your credit score, before you apply for a new account, you should always ask a credit card company if they report to the three credit bureaus. If the account doesn’t show up on your credit reports, it can’t help you improve your credit scores.
- A higher credit limit can be helpful. Getting a credit card with a higher credit limit may make it easier to maintain a low credit utilization rate. A $250 balance on a credit card with a $500 limit has a 50% utilization rate. But the same $250 balance on an account with a $2,500 credit limit features a low credit utilization rate of just 10%. Remember, lower credit utilization could result in a higher credit score. If your first credit card has a low credit limit (which is often the case), it’s even more important to keep your credit utilization low until you can qualify for a credit limit increase.
Can I have both types of credit cards?
If you can find credit card issuers that are willing to approve your applications, it is possible to open both secured and unsecured credit cards. Here are some tips on how to qualify for each type of credit card account.
How to qualify for a secured credit card
There are three common requirements you may need to meet to qualify for a secured credit card.
- Provide proof of your identity—your name, address, Social Security number, and date of birth.
- If you have filed for bankruptcy protection from your creditors, your bankruptcy should be discharged.
- Any current accounts on your credit report shouldn’t be in past-due status.
It’s worth noting that the requirements above aren’t universal. So, you may want to check with a credit card company to learn its specific approval criteria before submitting an application.
How to qualify for an unsecured credit card
Unsecured credit cards tend to have stricter approval criteria, especially rewards credit cards and those with competitive annual percentage rates and features. Again, every lender sets its own approval conditions. But it’s common for a good credit score
or an excellent credit score to be required for many unsecured credit card options.
You may be able to qualify for some unsecured credit card products with fair credit or even no credit at all. You should expect these types of accounts to feature less attractive terms and APRs.
Check your credit first
Additionally, it’s wise to get your free credit reports
, and possibly your credit scores
, before you apply for either type of credit card. Most lenders will review your credit when you apply for a new account. So it can benefit you to know where you stand before you start filling out applications.
If you discover problems in your credit report that might prevent you from qualifying for a new account, you can work on those issues first. And if you find credit reporting errors, you can take the opportunity to dispute
them with each credit bureau that’s reporting incorrect information.
How long should I keep my secured credit card?
A secured credit card can give you the chance to establish credit from scratch, or add a positive account to your credit report while you work to clean up past credit mistakes
. Once you open a secured card, keeping the account open for an extended period could be beneficial. Remember, your length of credit history accounts for 15% of your FICO® Score, and the older the accounts on your credit report grow, the better it is for your credit score.
Nonetheless, once your credit is strong enough to qualify for more attractive unsecured credit card options, there may come a time when you want to close your account. Here are three reasons you might want to consider closing a secured credit card.
- _The account features a high annual fee. A high APR on a secured card doesn’t have to be a big deal since it’s easy to avoid those expensive interest fees. Pay your statement balance in full every month, and you won’t have to worry about high interest rate costs. Annual fees, on the other hand, are something you’ll have to pay as long as the account remains open.
- You need to close a joint account. If you open a joint secured credit card with another person, there might come a time when you need to close the account. For example, it’s typically best for couples who are divorcing or separating to close joint accounts.
- You want your security deposit back. Maybe you need the money for an unexpected expense, or you want to put it to work in other ways. You’ll have to consider the benefit of getting the cash against a possible negative impact on your credit score from closing the account.
You’ll want to be strategic about how and when you close your credit card
if you decide you no longer want to keep the account open. Otherwise, the decision to close your account might backfire and hurt your credit score.
When is an unsecured credit card better?
A secured credit card may be your best option if you have no credit or bad credit
. Although you might be able to qualify for a subprime unsecured credit card in these situations, the account terms may be less competitive when you have credit challenges.
However, there is an exception to the rule above. If you can’t afford to put down a security deposit (a cash deposit), you might want to consider an unsecured credit card instead.
You may also want to review the Self Visa® Credit Card, which gives eligible borrowers the option to open a secured credit builder card
once they have $100 or more in savings (among other requirements) with a Credit Builder Account
, Self's credit builder
If you are considering a secured credit card, take the time to shop around for the best deal for your situation. It’s always wise to compare your financing options before you make your final decision.
About the author
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See Michelle on Linkedin
About the reviewer
Lauren Bringle is an Accredited Financial Counselor®
with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).