If you have bad or no credit, using a secured credit card wisely can assist you in establishing a positive credit history. Secured cards are similar to regular, unsecured credit cards in many ways. The primary difference between Secured And Unsecured Credit Cards is that the secured card requires a deposit (what makes it “secured”), whereas the unsecured card does not.
But that isn’t the only difference to be aware of when deciding which type of card is best for you.
Secured Credit Card vs Unsecured Credit Card
If you have a consistent monthly income, an ideal debt-to-income ratio, a good credit history, and the corresponding credit score, you have a good chance of getting a credit card without much difficulty. In fact, card issuers will work with you to get you a credit card.
What if you’re in a different situation – you don’t have a steady income, no/poor credit history or credit score, or you’re heavily in debt, for example? No issuer would approach you with a credit card or a loan.
Would you believe us if we said you could get a credit card in either case? Yes, you should, and we’ll show you how.
In the first scenario, if you have a clean financial record, you will be offered an unsecured credit card. Unfortunately, if you are in the second situation, you will still be offered a credit card, albeit a secured one with some restrictions.
Let’s delve a little deeper to understand the difference between secured and unsecured credit cards, how they work, and other factors to consider when applying for one.
What’s the Difference Between a Secured and Unsecured Credit Card?
Select explains the key differences between secured and unsecured credit cards.
Secured Credit Card
- Qualify with bad or no credit (and a deposit)
- High interest rates
- Few rewards
- Extra fees
- Almost always labeled “secured”
- Low credit limit
- Some don’t require a credit check
Unsecured Credit Card
- Qualify with good FICO score and credit history
- Lower interest rates
- Lots of rewards
- Few (or avoidable) fees
- Not clearly labeled as “unsecured”
- Credit limit based on creditworthiness
- Credit check required
Secured Vs Unsecured Credit Card
Secured credit cards, as opposed to regular credit cards, require a one-time, refundable deposit before you can be approved for the card. The bank holds the secured card deposit to cover purchases made with the card if the cardholder fails to make payments on the account. Consider it an insurance policy for the bank.
In most cases, if you open a secured card, the amount you deposit will be equal to the credit limit of the card, which is typically between $200 and $2,000. It is determined by the minimum deposit requirements and the amount of extra money added on top.
Secured card deposits do not cover your credit card bill on a monthly basis. Each month, you must pay the bill on time. If you do not pay the bill in full, you will be charged interest, which is frequently higher than the average credit card interest rate. Your deposit will be refunded once you have demonstrated your creditworthiness by keeping the account in good standing or when the account is closed.
Some secured cards charge an annual fee in addition to application processing and monthly maintenance fees.
All of this is in addition to the standard lineup of penalty and transaction fees that regular credit cards may charge.
Discover some of the other difference between these two types of credit cards.
The issuing bank will always conduct a credit check when you apply for an unsecured credit card. They’ll look at your credit score, repayment history, and other factors, such as the amount of debt you currently have. This determines not only your approval, but also your credit limit and interest rate.
Secured cards have no minimum credit score requirements, and some issuers will not even conduct a formal credit check. These cards may be marketed as “guaranteed approval” cards. In many cases, the deposit and fees for a secured card are sufficient for the bank to open your account.
Fees and APRs
Annual percentage rates (APRs) differ greatly between credit cards, but unsecured APRs are typically lower than secured APRs. Just as secured cards necessitate deposits, the higher APRs associated with secured cards serve as an insurance policy for the bank. If you qualify for a secured credit card, your interest rate will most likely be closer to 25%, as opposed to the current national average credit card APR of 16.28% in 2020.
APRs on secured cards are frequently the same for all approved applicants. In the meantime, many unsecured credit card issuers offer variable interest rates based on the applicant’s creditworthiness. The credit limit on a secured card is determined by the amount of the deposit made to secure the account. Unsecured credit limits are determined by creditworthiness and can be thousands of dollars higher than your actual monthly spending.
Better credit scores and credit histories can also qualify for lower interest rates on most unsecured credit cards. There are also unsecured cards that provide qualified new card applicants with promotional, limited-time 0% APR deals.
With unsecured cards, monthly maintenance fees are unheard of, and annual fees are often easily offset by rewards. People who do not want to pay any annual fees can also find such unsecured cards.
Secured card fees will appear on your card as charges. This will result in interest and a reduction in the amount of credit available. Pay them off as soon as possible, just like you would any other credit card purchase.
If you carry an unsecured credit card in your wallet, the account information will appear on your credit report. Unsecured credit card companies report your card activity on a regular basis to one or more of the three major credit bureaus: Experian, Equifax, and TransUnion. This information will have an effect on your credit history and FICO credit score.
Not all secured credit card issuers, however, report accounts to credit bureaus. Those who qualify for a secured card but require a positive credit history on their record should apply for an account that reports those important details to the credit bureaus.
If you’re thinking about getting a secured credit card to help you build (or rebuild) your credit, ensure that the issuer reports cardholder activity to at least one of the three major credit bureaus. If they aren’t, you’re just getting a bad credit card.
Only a few secured cards provide rewards. Secured cards are intended to assist holders in making purchases in order to establish a credit history. Unsecured credit cards, on the other hand, are frequently designed to entice customers by offering a variety 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 also apply for cards that reward those qualities with additional rewards and perks.
Which Credit Card Is Right for You?
If you have bad credit or need to build your credit history, a secured credit card may be right for you. Secured cards have few approval requirements for those who need to get back on their feet. If you’re new to credit cards, secured cards provide a deposit-protected and structured environment on which to build.
And, if you’re concerned about your initial deposit, you’ll usually get it back if you keep your account in good standing and pay off your balances.
If you have a good-to-excellent credit score and an established credit history, an unsecured credit card may be right for you. You will be able to take advantage of lower interest rates, fewer fees, and rewards programs. When it comes to unsecured cards, you have a lot more options, so whether you want a card with low interest rates, rewards, balance transfer deals, or excellent travel benefits, you’ll have plenty of options. You will also have a higher credit limit and may be less likely to negatively impact your credit utilisation ratio.
The credit utilization ratio is the percentage of total available credit that you have used. Assume you have a card with a credit limit of $10,000 and a balance of $2,500. That account has a utilization ratio of 25%. (Ratios of less than 30% are preferred.) The utilisation ratio is an important factor in determining a credit score.
The Bottom Line
Depending on what you need or want from a credit card, both secured and unsecured cards have advantages.
A secured credit card may be the best option for someone working to build or rebuild their credit history, though this type of card requires an initial deposit and may not offer many benefits.
An unsecured credit card, on the other hand, is the type of credit card you’re most likely to see advertised for, even if it doesn’t say “unsecured.” These cards may offer rewards, but they may be more difficult to obtain if your credit score is low. Even if you start with a secured credit card, keeping your account in good standing and paying your balance on time can help you get upgraded to an unsecured card.
Read also: How Do Credit Cards Work?