Understanding secured vs. unsecured credit cards

Written by
Maryalene Laponsie
Terms apply; see the online credit card application for full terms and conditions of offers and rewards.

If you are in the market for a new credit card, you may have run across some that are labeled “secured.” This isn’t a term describing the card’s security features. Instead, it indicates that the card requires an upfront deposit and is intended for those with limited or poor credit.

These cards serve an important purpose for those building their credit history, but before you apply, be sure you understand how to compare secured vs. unsecured credit cards.

What is the difference between secured and unsecured credit cards?

The most significant difference between a secured and an unsecured card is that one requires an upfront deposit and the other does not. However, the differences don’t end there. Secured cards can also differ from unsecured cards when it comes to the following:

  • Interest rate
  • Credit limit
  • Rewards

What is a secured credit card?

A secured credit card is one in which the cardholder is required to make an upfront deposit. This initial deposit is what “secures” the card.

In most cases, the credit limit on a secured card will be the same as the deposit amount. This assures a card issuer they will be able to recoup their money in the event the cardholder stops making payments.

Secured credit cards often come with high APRs, and many don’t offer any rewards. However, there are exceptions. For example, the CardName discontinued offers 1.5% cash back on purchases.

What is an unsecured credit card?

An unsecured credit card is one that doesn’t require any collateral such as a deposit. Instead, a card issuer is willing to extend a line of credit based on the strength of a person’s financial record and credit history.

The obvious benefit of an unsecured credit card is that you don’t need to put any money down to open an account. Since an unsecured card isn’t limited by a deposit, credit lines for these accounts are usually higher, and interest rates may be lower for those with good and excellent credit.

Unsecured credit cards are the most common type and there’s a broad range of options available, with many offering robust rewards and perks. Benefits may include cash back, rewards points, statement credits, travel insurance and more.

How to apply for a credit card

Regardless of whether you apply for a secured or unsecured credit card, the application process is similar. In both cases, you’ll need to complete an application with demographic and financial information, but secured cards have extra steps related to their deposit requirement.

How to apply for a secured credit card

Before you apply for a secured credit card, gather your banking information, Social Security number and financial information. Not all secured cards will run a credit check on applicants, but they will still ask for your Social Security number or tax identification number to comply with federal regulations and report your payments to credit bureaus.

Applications can vary by card, but most issuers will want to know your annual income, monthly mortgage or rent payment amount and your employment status. They will also ask you to select your deposit amount and link a bank account from which the deposit can be pulled electronically.

Most secured credit cards have a minimum deposit amount, such as $200, but they may also allow amounts as high as $5,000. The deposit you select will be your card’s credit limit.

When making your deposit, remember that the card issuer holds this money, and it won’t be available for you to apply toward payments.

How to apply for an unsecured credit card

When you apply for an unsecured credit card, you’ll be asked for much of the same financial information. However, there is no need to link to a bank account as part of the application process.

Instead, once you hit submit, the card issuer will evaluate your information and run a credit check. Most of the time, this process happens almost instantaneously, and you’ll immediately be told whether your application is approved or denied. However, in some cases, an application may be forwarded to a company representative for a manual review before a decision is made.

With an unsecured credit card, your credit limit will be determined by factors such as your income and credit history. There is no need to make a deposit or payment prior to using the card.

Should you get a secured or unsecured credit card?

When given the choice, most people would probably select an unsecured credit card. But for those with limited or poor credit, a secured card may be their only option.

Who should get a secured credit card?

Secured credit cards are best for people whose credit falls into one of the following categories:

  • New/No Credit: A secured card can help build a credit history for those who have never held a credit card or taken out a loan before.
  • Fair/Poor: If you have bad credit, it will be difficult to win approval for an unsecured credit card. Using a secured credit card can be a good way to establish a history of on-time payments and rebuild credit.

Who should get an unsecured credit card?

An unsecured credit card is a good choice for anyone with good to excellent credit who wants the convenience of being able to use a credit card for purchases. Some cards are also available to those with fair credit.

Using an unsecured credit card is your best bet to earn rewards, access value-added card perks and qualify for the lowest possible APR.

How to get an unsecured credit card

If you only qualify for a secured credit card right now, you may be wondering how to get an unsecured credit card. Fortunately, that is a simple process – although it’s not necessarily a quick one.

Once you’ve been approved for a secured credit card, use it to make small purchases that you can easily pay off before the end of the billing cycle. This will ensure you don’t pay interest charges while also establishing a history of timely payments. As a result, it will boost your credit score.

Some cards will automatically consider secured cardholders for a credit line increase after a certain number of on-time payments. For others, you may need to call and ask.

After you have demonstrated that you are using your credit line responsibly, some cards will return your deposit and convert your card to an unsecured account. Even if your card issuer doesn’t offer that option, you can apply for a new unsecured account from a different issuer once your credit score is high enough.

author
Maryalene Laponsie
Cardratings Contributor

Maryalene is a freelance contributor to CardRatings.com and specializes in personal finance topics such as credit cards, budgeting, saving and investing. She has written professionally for nearly 25 years and is a regular contributor to U.S. News & World Report, Money Talks News,...Read more

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