Credit cards come in different forms, and two common categories are secured and unsecured credit cards.
Both can be used for purchases and may help establish credit history when account activity is reported to credit reporting companies. However, the way they are approved and secured is different.
Understanding these differences can help consumers compare credit card options.
What Is an Unsecured Credit Card?
An unsecured credit card does not normally require a cash security deposit.
The card issuer provides a credit limit based on its evaluation of the applicant’s credit profile and other information.
The borrower can use the available credit and then repay the balance according to the card agreement.
Many traditional rewards, cash-back, travel, and low-interest credit cards are unsecured.
What Is a Secured Credit Card?
A secured credit card generally requires a refundable security deposit.
The deposit can serve as collateral for the credit account and may influence the initial credit limit, depending on the issuer’s terms.
For example, an issuer may require a $500 security deposit for a card with a corresponding credit limit.
The exact deposit requirements vary by card issuer.
Who May Consider a Secured Card?
Secured cards are often marketed toward consumers who are building credit or rebuilding their credit history.
Because the security deposit reduces some of the issuer’s risk, secured cards may be available to applicants who do not qualify for certain traditional unsecured cards.
However, approval is not guaranteed.
The issuer can still have credit, income, identity, and other eligibility requirements.
Do Secured Cards Build Credit?
A secured credit card may help build credit if the issuer reports account activity to the major credit reporting companies.
Before applying, verify which credit reporting companies receive information from the card issuer.
Simply having a secured card does not automatically guarantee a higher credit score.
Using the account responsibly and making payments on time are important.
The Security Deposit Is Not a Payment
One common misunderstanding is treating the security deposit as a payment toward the credit card balance.
Generally, the deposit serves as collateral according to the card agreement.
You still need to make your required monthly payments.
If you carry a balance, interest may apply depending on the card’s terms.
Compare APR and Fees
When comparing secured and unsecured cards, look beyond the credit limit.
Review:
- Annual fee
- Purchase APR
- Foreign transaction fees
- Late-payment fees
- Security deposit
- Minimum deposit
- Credit limit
- Rewards
- Credit reporting practices
A secured card with a high annual fee may not be attractive simply because it is easier to qualify for.
Can a Secured Card Become Unsecured?
Some card issuers may periodically review secured accounts.
Depending on the issuer’s policy and your account history, you may eventually qualify to have the account converted to an unsecured card or receive your security deposit back.
This is not automatic for every card.
Check the issuer’s current policy before applying.
Use the Card Carefully
A secured card is still a credit card.
Using a large percentage of the available limit or repeatedly missing payments can create financial problems.
If your goal is to build credit, consider using the card for manageable purchases and paying according to the card agreement.
Final Thoughts
Secured and unsecured credit cards can serve different types of consumers.
A secured card generally requires a refundable deposit and may be an option for people building or rebuilding credit. An unsecured card does not normally require a security deposit and is commonly offered based on the applicant’s credit profile.
Compare fees, APR, credit limits, rewards, deposit requirements, and credit-reporting practices before choosing a card.
Credit card terms vary by issuer and applicant, so review the current card agreement carefully before applying.