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.
Table of Contents
How secured credit cards work
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.
Pro tip: Think of the deposit on your secured credit card as a security deposit. Like a refundable security deposit protects your landlord or rental company if you default on rent, the money a cardholder uses to secure a credit card will go to the lender if a cardholder fails to make monthly payments on time.
They’re similar to debit cards, but your credit limit can’t exceed the total of your security 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 financial institution
- Pay off and close their account, then apply for a new one
Pro tip: 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.
Best secured credit cards
Quicksilver Secured Rewards Card from Capital One
First Progress Platinum Elite Secured Mastercard
Best credit-builder cards
Chime Credit-Builder Credit Card
Pro tip: If you already have an online banking account or have a savings account with one of banks, it makes the application process more straightforward.
READ MORE: What you need to know about credit-builder loans
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.
They are:
- Minimum deposit requirements: Secured cards require borrowers to leave a cash deposit with the credit card provider to open and maintain the account. Can you afford the deposit amount? The cash will only be accessible when the borrower upgrades or closes the account.
- Credit 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.and accessibility
- Qualification and accessibility: Secured cards are generally easier to qualify for than unsecured cards, as long as the borrower can afford the deposit.
- Interest rates: Like unsecured cards, secured cards usually will have a variable APR. All things equal, putting down a larger deposit can lower the interest rate on a credit card. But because users with higher scores will qualify for unsecured cards, that’s not always evident in practice.
- Rewards and perks: Secured cards are generally for helping people build credit, so they don’t always offer the perks that unsecured cards do (like cash back or travel points).
Pro tip: 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 with a more established credit history or who don’t have the cash for a deposit.
READ MORE: Need help now? Here are some resources
How does a secured credit card 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:
- 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.
- 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.
- 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.
- Transition to an unsecured card: Depending on the borrower’s credit, they may be able to upgrade to a traditional credit card somewhere between six months and the end of the first year.
Pro tip: 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.
Pros
- They’re easier to qualify for than unsecured cards
- They can help build credit scores faster than most other strategies
- You can use them for cash advances (you’ll pay a fee and interest, but they will be significantly cheaper than many payday loans)
- 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
Cons
- 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
Pro tip: 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 can a secured credit card increase my creditworthiness?
Whenever you try to borrow money, the lender will perform a credit check. This means that they’ll review a credit report from a credit reporting agency. Your credit score is a key indicator of your likelihood to repay money that you borrow. When you make on-time monthly payments to your secured credit card account, the credit card issuer reports those payments to the three major credit bureaus — Experian, Equifax and TransUnion. However, if you fail to make on-time payments by the due date, that also will be included on your credit report, which while cause your credit score (or FICO score) to decrease. Secured credit cards can be an important tool for building credit, but they can also hurt your score if you don’t use them correctly. A single late payment will stay on your credit report for seven years.
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.
It could be longer depending on the state of your credit score.
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
Pro tip: 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.
READ MORE: How to build credit without a credit card
The bottom line
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.
FAQs
With a secured card, your credit limit is set based on a cash deposit you pay to the lender.
A balance transfer credit card is a traditional unsecured credit card that offers an introductory rate for balance transfers, for example, 0% APR for 15 months, so cardholders won’t pay interest during that period. They will just pay a balance transfer fee. . Balance transfer credit cards are ideal for debt consolidation but are only available for borrowers with good credit.
A foreign transaction fee is a small fee that your credit card company will charge if you use your card overseas. This can include online purchases if you buy from a company that processes the transactions in the local currency. If you plan to travel or regularly send money to family internationally, look for a card with no foreign transaction fee.
Having bad credit can be expensive if you need to borrow money. The good news is that there are plenty of things you can do to improve your credit score now. They will take some time to work, so it’s never too early to start. First, keep all of your accounts in good standing. Make all payments on time — even if you can only afford to make the minimum payment. Sign up for a credit-builder loan, which can help you fix your credit score while also building a small savings account, use a service like Experian Boost to get credit for paying your routine monthly bills on time and be sure to regularly review your credit reports (you can get free copies at annualcreditreport.com) to ensure that they’re accurate and that there are no mistakes weighing down your score.
A secured credit card is primarily designed for people who need to build credit. As regular payments are reported to the credit bureaus, secured credit cardholders will build their credit history and qualify for a traditional unsecured credit card.
Prepaid cards are for people who simply want a cash alternative. Prepaid cards aren’t used for borrowing, and they won’t impact your credit score.
