Secured vs. unsecured credit cards

  • Posted on: 11 Aug 2023
    Secured vs. unsecured credit cards

  • When it comes to choosing between secured and unsecured credit cards, making the right decision can have a significant impact on your financial situation. Understanding the differences between these two types of cards is essential in order to make an informed choice. In this blog post, we will delve into the factual data surrounding secured and unsecured credit cards, weighing their pros and cons, and guiding you toward making the best decision for your financial needs. So, whether you're building credit or looking for better rewards, keep reading to discover the key differences between secured and unsecured credit cards.

    Financial Type/Services

    Secured credit cards

    Unsecured credit cards

    Cash deposit


    Not required

    Credit limit

    Lower. Usually equal to the deposit

    Higher, depending on credit score

    Interest rates

    Higher, often more than 20 percent

    Lower, depending on credit score (14–20 percent)

    Credit check

    Often not required




    Generally only for reward cards

    Helps to build credit

    Yes, if the card issuer reports to credit bureaus


    How do secured credit cards work?

    Secured credit cards are an excellent financial tool for individuals looking to build or rebuild their credit. They operate differently from traditional credit cards, requiring a security deposit to guarantee the credit limit.

    1. Understanding the Basics: Secured credit cards work similarly to regular credit cards. The key difference is that with a secured card, the cardholder must provide collateral in the form of a cash deposit, typically as a security against the credit limit. This collateral ensures that the card issuer has a backup if the cardholder fails to make payments.

    2. Determining the Credit Limit: The credit limit of a secured credit card is determined by the size of the cash deposit made by the cardholder. Typically, the credit limit is equal to the deposit or a percentage of it, ranging from 50% to 100% depending on the issuer's policies. For example, a $500 deposit would secure a credit limit of $500 or more.

    3. Building Credit History: One of the primary reasons people opt for secured credit cards is to build or rebuild their credit history. When you use a secured credit card responsibly by making on-time payments, maintaining a low credit utilization ratio, and showing responsible financial behavior, it helps establish a positive credit history. Over time, your credit score may improve, making you eligible for better financial opportunities.

    4. Securing a Refund: In most cases, secured credit cardholders can reclaim their security deposit after a specific period of responsible credit behavior. It may take several months, or even a year before you become eligible for a refund of your deposit. Some credit card issuers may also grant you an opportunity to upgrade your secured credit card to an unsecured credit card once you have proven your creditworthiness.

    5. Interest Rates and Fees: Like traditional credit cards, secured credit cards have interest rates, annual fees, and sometimes additional charges. It is crucial to review the terms and conditions before applying for a secured credit card to understand these costs fully. Some lenders may charge higher fees or interest rates due to the risk involved in issuing credit to individuals with limited or damaged credit histories.

    6. Responsible Credit Card Usage: To maximize the benefits of a secured credit card and build a solid credit history, follow these essential tips:
    • Pay your statement balance in full and on time.
    • Keep your credit utilization ratio below 30%.
    • Avoid carrying a balance whenever possible.
    • Regularly check your credit report to ensure accuracy.
    • Avoid applying for multiple credit cards simultaneously, as it may negatively affect your credit.

    Do secured credit cards help your credit?

    Secured credit cards can indeed help improve your credit score and financial standing. These types of cards require a cash deposit as collateral, which provides security for the lender in case you fail to make your payments. This deposit typically becomes your credit limit, giving you the same spending power as a traditional credit card. By responsibly using a secured credit card, you can demonstrate your ability to manage credit and make timely payments, which is a crucial factor in building good credit.

    Secured credit cards also provide an opportunity to develop healthy credit habits. When using a secured credit card, it's essential to make regular, on-time payments and keep your utilization rate low. Utilization rate refers to the percentage of your available credit that you use. By keeping your utilization rate below 30%, you demonstrate responsible credit management, which can positively impact your credit score over time.

    While secured credit cards can be a useful tool for improving credit, it's crucial to choose the right card and lender carefully. Look for cards with reasonable interest rates, low or no annual fees, and lenders who report your activity to the major credit bureaus. Additionally, be sure to review the terms and conditions thoroughly to understand any potential fees or restrictions associated with the card.

    Pros and Cons of secured credit cards

    Secured credit cards can be considered a stepping stone for individuals looking to establish or rebuild their credit history. These cards are backed by a cash deposit that serves as collateral, reducing the risk for lenders. However, like any financial product, secured credit cards have both pros and cons.

    1. Credit Building Tool: Secured credit cards offer a chance for individuals with limited or poor credit history to build their credit scores. By making regular, on-time payments and keeping credit utilization low, users can demonstrate responsible credit behavior.

    2. Easy Qualification: Obtaining a secured credit card is typically easier compared to unsecured cards. Since the deposit serves as collateral, lenders are more willing to approve applications, even for those with less-than-perfect credit.

    3. Financial Discipline: Using a secured credit card can promote financial discipline. By having a set credit limit equal to the deposit, users are forced to manage their spending and live within their means.

    4. Upgrade Potential: Many secured credit card providers review cardholders' accounts periodically. If users demonstrate responsible behavior over time, they may be eligible for an upgrade to an unsecured credit card with a higher credit limit.

    5. Global Acceptance: Secured credit cards are usually accepted worldwide, just like their unsecured counterparts. This makes them convenient for travelers or individuals making online purchases from international merchants.


    1. Initial Deposit Requirement: Secured credit cards require an initial deposit, which can range from a few hundred to a few thousand dollars. This deposit is used as collateral and can tie up funds that could be used for other purposes.

    2. Annual Fees and Interest Rates: Many secured credit cards have annual fees, which can eat into the available credit. Additionally, the interest rates on these cards might be higher compared to traditional unsecured cards.

    3. Credit Limit Constraints: The credit limit on secured cards is typically equal to the deposit made, which can be limiting for those looking to make larger purchases. This can also affect credit utilization ratios if it's difficult to keep balances low.

    4. Lack of Rewards: Secured credit cards often do not come with rewards programs or other perks commonly found in unsecured cards. This means that users miss out on cashback, travel points, or other benefits.

    5. No Guarantee of Approval: While secured credit cards have higher approval rates, users are not guaranteed approval. Lenders still consider factors such as income, employment history, and other debt obligations when assessing applications.

    How do unsecured credit cards work?

    Unsecured credit cards are a popular financial tool for individuals looking to establish or rebuild their credit history. Unlike secured credit cards that require a cash deposit, unsecured credit cards don't require any collateral.

    1. No collateral, greater flexibility: Unsecured credit cards are not backed by any collateral, making them a more accessible option for people with limited funds. Borrowers don't need to deposit a specific amount to open an account, giving them greater financial flexibility.

    2. Credit limit determined by lender: The credit limit on an unsecured credit card is determined by the lender based on factors such as the borrower's credit history, income level, and debt-to-income ratio. The higher the credit score and income, the higher the credit limit might be.

    3. Revolving credit: Unsecured credit cards operate on a revolving credit system. This means that the borrower has a set credit limit and can use the card to make purchases up to that limit. Each month, a minimum payment is required, and the remaining balance rolls over to the next month with interest charges.

    4. Interest rates and fees: Unsecured credit cards typically have higher interest rates compared to secured credit cards or other types of loans. Additionally, lenders may charge various fees, including annual fees, late payment fees, balance transfer fees, cash advance fees, and foreign transaction fees. It's essential to read and understand the terms and conditions before applying for a card.

    5. Building credit history: Unsecured credit cards can be beneficial for individuals looking to establish or improve their credit history. Responsible use of the card, such as making payments on time and keeping credit utilization low, can help to build a positive credit profile. Over time, this can lead to improving your credit scores and eligibility for better credit opportunities.

    6. Risk of debt accumulation: While unsecured credit cards offer flexibility, borrowers need to be mindful of their spending habits. If users accumulate excessive debt and are unable to make their payments, it can lead to financial stress, damage to their credit score, and additional fees. It's crucial to use these cards responsibly and within their means.

    7. Potential credit limit increases: As borrowers demonstrate responsible credit card use and build a positive credit history, lenders may increase the credit limit on their unsecured credit card. This can provide greater financial flexibility and help improve credit utilization ratios, resulting in a positive impact on credit scores.

    Pros and cons of unsecured credit cards

    Unsecured credit cards have become increasingly popular in recent years due to their accessibility and convenience. These types of credit cards do not require collateral, making them a suitable option for individuals who may not have assets to secure their credit lines.

    Pros of Unsecured Credit Cards:

    1. Accessibility: One of the main advantages of unsecured credit cards is that they are widely available to a broad range of individuals. Whether you have average credit, bad credit, or no credit history at all, you can still be eligible for an unsecured credit card.

    2. No collateral required: Unlike secured credit cards, unsecured credit cards do not require collateral such as a cash deposit or a lien against an asset. This can be a significant advantage for those who do not have valuable assets to use as collateral.

    3. Convenience: With an unsecured credit card, you have the freedom to make purchases at any merchant that accepts credit cards. This convenience allows you to make online purchases, pay bills, and even travel without the hassle of carrying large amounts of cash.

    4. Building credit: Unsecured credit cards provide an opportunity for individuals with limited or no credit history to build their credit scores. By using the card responsibly and making timely payments, you can establish a positive credit history, which can be beneficial when applying for loans or other credit products in the future.

    Cons of Unsecured Credit Cards:

    1. Higher interest rates: The interest rates charged on unsecured credit cards, especially for individuals with poor credit, are generally higher compared to secured credit cards or other forms of borrowing. This can result in higher costs if you carry a balance or make late payments.

    2. Limited credit limits: Unsecured credit cards often come with lower credit limits, particularly for those with poor credit. This can pose a challenge if you need to make significant purchases or need emergency funds. However, by consistently making timely payments and demonstrating responsible credit behavior, you may be able to request a credit limit increase over time.

    3. Annual fees: Some unsecured credit cards may come with annual fees. These fees can vary widely, ranging from reasonable to exorbitant. It is essential to carefully consider the fees associated with the card before applying.

    4. Potential debt risk: While unsecured credit cards can provide financial flexibility, they may also increase the risk of falling into debt if not used responsibly. If you overspend and carry a balance, high-interest charges can accumulate and lead to a cycle of debt that becomes difficult to break.

    Is it better to have a secured or unsecured credit card?

    When considering credit card options, one important decision to make is whether to choose a secured or unsecured credit card. Each type of card has its own advantages and considerations that should be weighed before making a decision.

    Secured credit cards are typically recommended for individuals who have limited credit history, or a low credit score, or for those looking to rebuild their credit. These cards require users to provide a refundable security deposit that serves as collateral for the credit limit. The credit limit is often equal to the amount of the security deposit. Secured credit cards offer an opportunity to establish or improve creditworthiness since responsible usage and timely payments can positively impact credit scores. They also provide a level of financial discipline since borrowers must have the funds to secure the card. However, one downside of secured cards is that they often come with higher interest rates and fees compared to unsecured cards.

    On the other hand, unsecured credit cards do not require a security deposit. They are extended to individuals based solely on their credit history, income, and creditworthiness. Unsecured credit cards typically have higher credit limits and provide greater spending flexibility. These cards are beneficial for individuals who have already established a good credit history and have a higher credit score. Unsecured credit cards also tend to have lower interest rates and fees compared to secured cards. However, they can be more difficult to obtain for those with lower credit scores, and there is a risk of overspending if not used responsibly.

    At the end of the day, the choice between a secured or unsecured credit card depends on the individual’s unique financial circumstances and goals. If the primary objective is to build or rebuild credit, a secured card may be the better option. Conversely, if the individual has a good credit score and is looking for more spending flexibility, an unsecured card may be more suitable. Ultimately, it is important to choose a credit card that aligns with personal financial goals and to use it responsibly to maintain a healthy credit profile.

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