How Do Secured Credit Cards Work? How Are They Different From Unsecured Cards?

Credit cards come in all shapes and sizes. Well, most of them are roughly 7-square-inch rectangles, but they do have very different qualities. In particular, secured credit cards work differently from their unsecured counterparts.

There are pros and cons to both types, and which one you need will depend on your credit scores and intentions for the credit card. Here’s what you need to know about the differences between secured and unsecured credit cards.

What Is a Secured Credit Card?

Secured credit cards require borrowers to put down a deposit with their bank as collateral. Usually, the deposit is equal to the limit on the card. That way, even if the borrower fails to pay, the lender can just take the balance out of the deposit.

Secured credit cards are usually a tool for people who want to improve their credit scores. They generally have lower credit requirements and are tailored for specific parties.

For example, there are secured credit cards specifically for college students. People still in college usually haven’t had any credit accounts before. Without a credit history, their scores are essentially zero. There are also credit cards for people who have made some mistakes and need to rebuild their scores after the fact.

Secured credit cards improve credit providing borrowers an opportunity to demonstrate their responsibility at very little risk to the lender. Payment history is one of the most impactful factors in a credit score.

After using the secured card well for long enough, borrowers can get their deposit back and switch to an unsecured card by:

  • Qualifying for an upgrade with the same account and card provider
  • Pay off and close their account, then apply for a new one

Usually, the first option is preferable, even if the account doesn’t have many perks. Closing old accounts will typically hurt credit scores by lowering the average account age, diversity of existing accounts, or utilization ratio.

What Is the Difference Between Secured and Unsecured Cards?

Most of the differences between secured and unsecured cards have to do with their terms, not their inherent mechanics or function. There are five that people should be aware of and consider before applying.

Here they are:

  • Deposit Requirements: Secured cards require borrowers to leave a cash deposit with the credit card provider to open and maintain the account. The cash will only be accessible when the borrower upgrades or closes the account.
  • Limit: Secured cards usually have limits equal to the deposit on file. If a borrower can’t afford more than a $1,000 deposit, they won’t be able to get more than a $1,000 line of credit.
  • Accessibility: Secured cards are generally easier to qualify for than secured cards, as long as the borrower can afford the deposit.
  • Rates: All things equal, putting down a deposit can lower the interest rate on a credit card. But because unsecured cards are also usually for people with higher scores, that’s not always evident in practice.
  • Perks: Secured cards are generally for helping people build credit, so they don’t offer the perks that unsecured cards do (like cash back or travel points).

In general, secured cards are usually better for people who can’t qualify for a credit card on the merit of their scores. Unsecured cards are better for people who have a more established credit history or don’t have the cash for a deposit. 

How Do Secured Credit Cards Work?

Besides the requirement for a deposit, secured cards secured credit cards have identical mechanics as unsecured cards. Here’s a broad outline of how secured credit cards work from start to finish:  

  1. Apply for the account: Secured cards have lower credit requirements in general, but that doesn’t mean they don’t have any expectations. Double-check what they’re looking for before applying.
  2. Fund the deposit: It’s often easiest to take a credit card out with the bank they already use for their checking account. They might be more likely to approve the application. Transferring funds between the two would also be faster. 
  3. Use the card responsibly: Once the deposit goes through, the borrower can begin to use the card as they see fit. They must use it responsibly to transition to an unsecured card later on.
  4. Transition to an unsecured card: Depending on the borrower’s credit, they may be able to upgrade to an unsecured card in as little as six months.

Secured credit cards are good practice. Because the limits are usually lower, they’ll help borrowers who are new to credit build good habits with relatively low risk.

Pros and Cons of Secured Credit Cards

People should only choose to use secured credit cards under the right circumstances. It makes the most sense when they don’t have a great credit score but do have access to some cash. That’s because secured cards come with the following advantages:

  • They’re easier to qualify for than unsecured cards.
  • They can help build credit scores faster than most other strategies.
  • Banks protect the deposit and may give it back eventually (plus interest).

That said, they’re not universally beneficial. People with a higher credit score or low funds might prefer to avoid secured cards because of the following drawbacks:

  • It can be difficult to save up for the necessary deposit.
  • They might come with burdensome fees.
  • Their limits can be lower than people would prefer.
  • The borrower has no access to the deposit until they transition out.

There’s no universally correct answer as to whether a secured card is the right move.  Everyone’s credit situation is unique, and there’s almost as much variation between secured credit cards. Just weigh the pros and cons and use the chosen card responsibly.

How do I transition to an unsecured credit card?

Most borrowers that take out a secured credit card want to transition to an unsecured card as soon as possible. That might be because they want their money back, a higher card limit, better perks, or all of the above.

Whatever the motivation, here’s what people should know about the process.

How Long Does It Take?

The time frame will generally be shorter when the borrower had better credit before getting the secured card and uses the card responsibly. It’s impossible to pin the window down, but it will usually be somewhere between six months and a couple of years.

For borrowers with zero credit history, it’s usually nearer the shorter end of the spectrum. Banks will frequently include an option to reassess whether a brand new borrower qualifies for an unsecured card between six months and a year from their start date.

For borrowers who have demonstrated less than satisfactory credit habits, it will take longer. How much longer depends on how bad the damage is.

People with a moderate amount of mistakes on their credit reports may take just a couple of years to turn things around. Those whose credit scores are recovering from something like bankruptcy may need to wait for even longer, though the upper limit is unpredictable. 

It also depends partially on the banking institution. Some will automatically upgrade a borrower and refund the deposit after a set amount of time. Others will only consider transitioning a borrower to an unsecured card if they make a special request.

How Do You Speed Up the Process?

Lenders will be willing to transition borrowers to an unsecured card when they satisfactorily demonstrate that they’re responsible enough for one. The best way to do that is to:

  • Spending some to show that they’re using the card
  • Keeping the balance well below the upper limit (try for under 30%)
  • Paying off the balance each month before interest has a chance to accrue

For people who need a credit card to cover bills they can’t afford, it’s tough to maintain this. People who want to stay safe and transition to an unsecured card as quickly as possible should only buy things they could buy with cash.

It’s also worth setting up automatic payments. People who don’t spend more than they have in cash aren’t at risk of overdraft fees.

Finally, check card agreements, search the internet, or ask the bank directly to see how their process works. Asking is the best way to be sure of the absolute shortest path to an unsecured card, and it may even kickstart the application.

Going Forward

Unsecured credit cards are one of the best ways for people to build up their credit. They’re good practice, relatively safe, and more accessible than unsecured cards, even for people with lower than average credit scores.

Just make sure that you do your due diligence before applying. Not all secured cards are the same. Watch out for any application or annual fees.

If you do qualify for one, make sure to use it responsibly. Live within your means, keep the balance low, and pay everything off each month. You’ll be able to transition to an unsecured card in no time.

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