Secured vs. Unsecured Credit Cards: What's the difference?

What’s a secured credit card?

A secured credit card is a type of credit card that requires a refundable cash deposit upfront. Unlike unsecured cards, where your credit limit is based on your credit profile, a secured card's limit matches your deposit. For example, a $100 deposit would give you a $100 credit limit. These cards are typically for people who are new to credit, have limited credit history, or are looking to rebuild a low credit score.

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What’s an unsecured credit card?

Most traditional credit cards are unsecured, often what you may see in advertisements. With an unsecured credit card, you don't need to submit a cash security deposit to set your credit limit. Instead, your limit is determined by your creditworthiness, income, and credit history. Unlike secured cards, unsecured cards offer limits based on your credit profile and often come with better perks, rewards, lower fees, and interest rates. However, qualifying for an unsecured credit card can be difficult if you have a lower or nonexistent credit score — that's what makes secured credit cards a good alternative.

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Choosing the right card for you

Both secured and unsecured credit cards offer a range of features that can differ depending on the issuer and card type. When choosing between the two types of cards, here are some things you should consider:

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Credit history

• Secured credit cards are great for those looking to build or improve their credit profile — think students or recent grads. They're also a good fit for individuals with lower credit scores (a FICO score of 580 or below), which can include people who have experienced financial difficulty at some point.
• Unsecured credit cards are best for those with more established credit histories and can be challenging to get if you don't have at least a fair credit score. However, they can still help you build credit and often offer better perks if your credit score is higher.

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Security deposit

• Secured credit cards require a refundable cash security deposit that sets your credit limit.
• With unsecured credit cards, no deposit is required. Instead, your approval depends on your credit score and overall credit history.

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Credit limit

• Secured credit cards usually have lower credit limits tied to your security deposit, but using your card responsibly might open the possibility of increasing your limit over time.
• Unsecured credit cards generally offer higher credit limits based on your credit history and income, with the potential for increases based on increases in credit worthiness and/or income.

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Interest rates

• Secured credit cards tend to have higher interest rates because they're a higher risk to lenders.
• Unsecured credit cards can offer lower interest rates compared to their unsecured counterparts. This can depend on factors beyond the borrow, such as the type of lending institution (ex: bank vs credit union).

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Annual fees

• Some secured credit cards may have annual or maintenance fees, but this varies by issuer. Some might not have any fees at all.
• Annual fees for unsecured credit cards can vary widely. Some cards may have no annual fee, while others, especially those with premium benefits, might charge more.

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Rewards

• The best secured credit cards usually offer cash-back rewards, but many come with limited or no rewards.
• Unsecured credit cards often offer rewards like cash back or travel points. Some cards even focus on specific types of rewards to match different spending habits.

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How to apply for a secured vs. unsecured credit card

Applying for a secured credit card is similar to applying for an unsecured credit card, but there are a few key differences. Secured cards might not require a credit check, but they always need a cash security deposit upfront to open the account. On the other hand, unsecured cards typically involve a credit check and may take a few days to get approved.

For both types of cards, be sure to review the terms carefully, including fees and interest rates, and have your financial details ready to streamline the process. Here's the information you'll likely need to apply for either type:

• Full legal name
• Social security number (SSN) or individual taxpayer identification number (ITIN)
• Street address
• Phone number
• Employment status
• Annual income before taxes
• Housing costs (rent or mortgage)

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Graduating from a secured card to an unsecured card

Many secured cards offer an upgrade to an unsecured card as your credit improves, and some even do this automatically after a series of on-time payments. If your secured credit card doesn't offer a clear upgrade path, you can always apply for an unsecured credit card on your own. In fact, it's common for people to use both secured and unsecured cards for different purchases. That way, you can enjoy the benefits and perks of both.

If you feel you've outgrown your secured credit card and decide to close the account, you'll typically get your full security deposit back as long as your account has no balance. However, closing credit card accounts can reduce your available credit and potentially lower your credit score, so consider whether it’s best to keep the account open if possible.