Different credit cards have different uses. For instance, some are best for travel, while others are great to use at the gas station. One of the biggest distinctions between cards is secured vs. unsecured credit cards.
While both can be spent the same way, both cards are handled differently. Here’s how secured and unsecured credit cards work and how you can use them both to your advantage.
Secured vs Unsecured Credit Card: What’s the Difference?
When applying for a credit card, your credit score and history are evaluated to see if you’re a good candidate to use the card. If your credit is strong and you can prove you’re responsible with credit, you’ll most likely be approved for an unsecured card. If you’re denied, you might be able to apply for a secured credit card.
An unsecured credit card is a card with a limit based off your credit score. You can use it however you want, then pay off that balance at the end of the pay period. Sometimes unsecured cards charge interest if you carry a balance over to the next pay period.
It’s called an unsecured card because you’re not using any type of collateral to “secure” approval and usage of the card. Instead, a lender pulls your credit report see if your creditworthiness is strong enough to be a responsible credit card user.
A secured card is “secured” with a cash deposit. That deposit serves as your credit limit. You can use a secured card like an unsecured card, making payments at the end of a billing cycle as well.
How does a Secured Credit Card Work?
If you don’t have strong credit and want to start improving your credit score, using a secured card can help.
Once you’re approved for a secured credit card, you’ll be able to fund your deposit. Some lenders require a minimum account deposit for use. For instance, the Bank of America secured credit card requires a minimum of $300 to get started.
Most secured credit cards report your activity to the three major credit bureaus: Experian, Equifax, and TransUnion. But there are some that don’t. Before you apply, make sure your potential lender reports your usage. Otherwise, you’ll be using a card without seeing any jump in your credit score — the biggest benefit of using a secured credit card.
You can use your secured card like a regular credit card — on purchases at the grocery store, dining out, the gas station and online shopping. But you can only spend as much as your deposit. In case you miss a payment or you’re late making one, a lender can use your deposit to make payments on what you owe.
You’ll have a minimum payment every month and if there’s a balance lift over, you’ll get charged an interest payment. Typically, interest payments on secured credit cards are higher than those of unsecured credit cards since you don’t have a strong credit history to prove you’re responsible with credit. Since a lender is taking a chance by approving you, a higher interest rate is another level of protection for them.
If you’re not sure if you can afford to use a secured credit card on all your purchases every month, it might be a good idea to limit your spending. For instance, only use the card when you fill up at the gas station or go to the grocery store. Remember that you can only use what you have, which can help you keep your spending in check.
A secured card is not a prepaid card. A prepaid card is like a gift card. It has a certain amount of money loaded onto it and every time the card is used, the amount on the card goes down. It’s not linked to any bank accounts and prepaid card use isn’t reported to the major credit bureaus. This means they won’t help you build your credit.
Before signing up for a secured credit card, check out:
- Annual fees: Some secured credit cards charge an annual fee for use. Not all do. This is an added cost of using a card and most of the time, avoidable if you go with another lender.
- Interest rates: Secured credit cards tend to have higher interest rates compared to unsecured credit cards. Remember that interest charges are added when you carry a balance from month to month. If you can’t pay your balance in full at the end of the pay cycle, interest charges will be applied.
- Credit bureau reporting: Building credit is one of the main reasons for using a secured credit card. If a potential lender doesn’t report your usage to the major credit bureaus, keep looking for one that does.
After responsible secured credit card use over the course of a few months — usually around a year — you might be able to move up to an unsecured credit card and receive your original deposit back. If you’ve had late payments or haven’t been able to pay your bill, you might not be able to move up to an unsecured card.
How does an Unsecured Credit Card Work?
An unsecured credit card doesn’t require a deposit to use it. You’re approved based on strong credit history. If you can prove your creditworthiness, you’re more likely to get approved. Keep in mind, though, that some credit cards require excellent credit, while some require fair or good credit. This means you might get approved for some unsecured credit cards, but not others, depending on your credit.
Your interest rate for an unsecured credit card is also based on your credit score. The higher your credit score, the lower your interest payments will be. While you might be able to get an unsecured credit card with fair credit, you might face higher interest rates compared to someone with good or excellent credit.
You can use an unsecured credit card like you would use a debit card. Many times, the biggest benefits of a credit card are the rewards you get from usage. Some cards feature cashback when you use them at certain stores while others will give you points when booking flights, hotel or other travel-related expenses.
Once you make your purchases on your credit card, you’ll need to make payments. At the end of the billing cycle, you’ll have payments due. You can make the minimum payment but to avoid interest charges, you can pay the balance in full.
If you don’t make at least the minimum payment every month, you might face late payment charges. Along with that, credit usage gets reported to the three major credit bureaus. If you miss payments or pay some late, your credit score could drop.
Also, if you have a high credit utilization rate — or you use most of your available credit — creditors see you as a risky borrower. It could hurt your chances of getting approved for credit down the road.
Late payments can also trigger a late fee. While unsecured credit cards usually have lower fees compared to secured cards, they still exist. Late payments not only hurt your credit score, but they will also cost you more in the long run.
Before signing up for an unsecured credit card, review your options, including:
- Requirements: What’s the minimum credit score you need to qualify? Check your credit score for free online using your bank, Credit Karma or Mint. Also, check to see if there are income or salary requirements to maintain the card.
- Fees: Is there an annual fee for using the card? Is there a late payment fee if you don’t pay on time? Is there a foreign transaction fee if you use the card overseas? Unsecured cards tend to have lower and fewer fees compared to secured credit cards, but not always.
- Rewards: What do you get back for using a specific card? Some unsecured credit cards don’t have any rewards or benefits, other than simply using the card. Look for ones that have the most cashback for shopping at places you frequent or the most reward points when you book travel-related expenses.
What Do Secured and Unsecured Credit Cards Have in Common
When comparing both secured and unsecured credit cards, there are a few things they have in common, including:
- Building credit: If you choose the right cards that report to the major credit bureaus, both secured and unsecured credit cards can help you build credit. With that being said, irresponsible use could mean you’d see a credit score drop, even if you already have poor or sparse credit to begin with.
- Available mostly everywhere: Secured cards can be used like unsecured cards. When you fill up your gas tank or shop online, you can use either card, as long as the issuer is accepted. Think Visa or Mastercard.
- Easy application: For both types of cards, you can apply for them online within a few minutes. This helps you avoid hitting a bank within certain business hours, which may not be convenient for you.
Sometimes, you can qualify for an unsecured card with a poor credit score or limited credit history. This means both secured and unsecured cards can help you beef up your credit score. However, this isn’t a universal standard and not every credit card issuer or type is required to approve you based on your credit score. Before applying for an unsecured credit card with poor credit, read the credit score requirements first to make sure you qualify.
When to Use a Secured Card vs. an Unsecured Card
Since both types of cards can essentially be used the same, you’ll have to determine what you need to use a credit card for. Ask yourself a few questions, like:
- Is my credit score enough to stand on its own? If you’ve never had any type of credit before, it’s going to be difficult to prove to lenders you’re a trustworthy borrower. Building up your credit with a secured credit card can help you establish credit, boost your credit score, and show lenders you’re a responsible credit card user. If you have a credit history, even a sparse one, you might qualify for an unsecured card.
- What are the fees like? Secured credit cards may give you a chance to establish credit, but to protect the company, they set higher protections, including more — and often higher — fees. Using a secured credit card means potentially paying more when you slip up. If you can handle the extra fees, a secured card might be worth it. And eventually graduating to an unsecured credit card.
- Can I afford monthly payments? Regardless of which type of card you choose, responsible credit usage means only spending what you can afford to pay back each month. If you have to carry a balance, you’ll face interest rates, boosting your overall payment and your credit utilization. Secured credit cards tend to have higher interest rates compared to unsecured cards.
- Do I want rewards? Using a credit card to establish and build your credit is a good idea, but you can also use it to gain rewards, like cashback and travel points. If your sole purpose is to start your credit journey, you might not find a card that offers benefits and rewards. If you have a sparse credit history, you might be able to qualify for an unsecured credit card with rewards. The higher your credit score, the more likely you are to get approved. That’s because you’ve proven you’re a responsible credit borrower and user.
How to Apply for a Secured Credit Card
If you aren’t sure where to get your secured credit card, it’s a good idea to browse through many different offers before choosing one.
The best secured credit cards skip the annual fee, reports to the three major credit bureaus, and has a reasonable APR. There are some secured cards that offer rewards, but not many since the main purpose is to build up credit.
Once you find the right card, you’ll apply online through the issuer or lender. You’ll complete personal and financial information, like your address and salary. You’ll also need to give permission for the company to conduct a credit check. Once approved, you’ll add a bank account to your card to fund your deposit and eventually make monthly payments.
How to Upgrade to an Unsecured Credit Card
When you upgrade to an unsecured card depends on how long you’ve been responsibly using your secured credit card. It also depends on the secured card you’ve chosen.
Some cards will allow you to upgrade within a few months of responsible use, while others will have you wait about a year. The safest way to make sure you’ll qualify for an upgrade is to keep tabs on your credit score. Check it as frequently as every week or as regularly as every month. If you have an unsecured card in mind that you’d like to apply for, see what their minimum credit score requirements are. That way when your score gets high enough, you can apply for it. Not all cards have the same requirements, so make sure you know what each card requests before applying for it.
Depending on the card you choose, you might automatically get upgraded to an unsecured credit card and refund your deposit.
Regardless of when you upgrade, it’s important to maintain good credit habits. Don’t spend more than you can afford and do your best to pay off your full balance every month. If you have to carry a balance, try to keep it as low as you can to avoid a hefty interest charge.
Final Word: Secured vs Unsecured Credit Cards
Beginning your credit journey isn’t always the smoothest ride. You might not be able to get the first card you set your sights on, but that doesn’t mean you won’t be able to get any card.
Secured cards are a solid option for creating a good credit history, but it doesn’t come without its limitations. You’ll need to be able to afford a minimum deposit, which serves as your credit limit. Unsecured credit cards set your limit based on your credit score — often much higher than what a secured credit score minimum is.
Even though most credit cards have fees, secured cards have another layer of protection through higher and more expensive fees. If you have a secured card, make sure you always pay your bill on time every month and avoid fees whenever you can. That way you can upgrade to an unsecured card sooner from responsible credit usage.
Both types of cards can help you build up your credit score and eventually maintain a high score once you get there. After you’ve worked on establishing credit, you can reap rewards from other types of cards. Not many secured credit cards offer rewards, so when the time comes to get an unsecured card, find the one that has minimal fees, no annual fee (or one you don’t mind paying) and one with rewards you’ll maximize.
Remember that smart credit card use is the most important part of having a credit card, regardless of which card you have. The more you pay on time, keep your usage low, and avoid carrying a high balance, the more your credit score will increase. Along with that, your credit report will show positive credit activity, which helps your chances of being approved for other types of credit in the future. If you ever need to borrow money through a car loan, mortgage, or another credit card, your responsible credit card use will help you.
This article was originally written on December 23, 2019.