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Secured credit cards differ from unsecured credit cards because they require a cash deposit to act as collateral. This cash deposit represents your credit limit, meaning you can only spend up to the amount you deposited. On the other hand, traditional credit cards are unsecured. These allow you to use your credit without needing to deposit collateral. Both types of cards require you to pay your balance fully each month.
In this article, we review the pros and cons of unsecured and secured credit cards, discuss how each type of card works, and compare their differences.
First, we’ll start with secured credit cards and their features.
How Do Secured Credit Cards Work?
Secured credit cards are a type of credit card that requires a cash deposit. The amount of the deposit equals the amount of credit you have. For example, if you deposit $500, your credit limit will be $500. If you fail to make a monthly payment, your lender will use the deposit to reimburse itself.
Secured credit cards are ideal for people who wish to improve their credit score if they have a low or non-existent credit score. These cards are also more accessible for people with a risky credit history and who have defaulted on payments in the past.
The main features of secured credit cards include:
- Required deposit: The deposit acts as your credit limit.
- Reports to credit bureaus: The credit history on a secured credit card is shared with most major credit bureaus, allowing you to build credit.
- Annual Fee: Secured credit cards typically come with an annual fee, although some may waive this fee for the first year.
- Interest rates: Secured credit cards may have higher interest rates when compared to traditional credit cards because secured credit cards are targeted at individuals with a poor credit history.
Now that you know the basic features, let’s compare the pros and cons of secured credit cards:
The Pros Of Using A Secured Credit Card
- Credit building: The main advantage of using a secured credit card is the ability to build or rebuild credit.
- Controlled spending: Since your deposited amount limits your credit, you can control how much you spend using your credit card.
- Approval chances: Secured credit cards are often easier to obtain than unsecured ones, making them a viable option for individuals with limited or no credit history.
- Financial education: Many secured credit card issuers provide educational resources and tools to help cardholders learn about credit management, budgeting, and responsible spending.
The Cons Of Using A Secured Credit Card
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- Required cash deposit: The main disadvantage of a secured credit card is the cash deposit requirement. Not everyone can afford a deposit, which can be a barrier to obtaining a secured credit card. Additionally, your lender holds the deposit for as long as you have the card, limiting your access to those funds.
- Higher interest rates: The interest rates on secured credit cards are higher than on traditional credit cards. Make sure to compare rates to get the best deal possible.
- Limited credit limit: You will likely have a lower credit limit than unsecured credit cards since your deposit sets the limit.
- Limited benefits: Secured credit cards generally offer fewer benefits and rewards when compared to unsecured credit cards. This is because they are designed for credit building rather than providing perks such as cashback or travel rewards.
Depending on how you look at it, the controlled credit limit on a secured credit card can help you spend less, but it can also limit your opportunities in the case of a financial emergency. Overall, secured credit cards can help you establish a positive credit history, gain control over your spending and increase your chances of credit approval. Soon enough, you can transition to an unsecured credit card with better terms.
How Does An Unsecured Credit Card Work?
Unsecured credit cards come to mind when you think of a typical credit card. Unlike secured credit cards, traditional credit cards do not need a cash deposit as collateral. Instead, the credit limit is determined based on your creditworthiness. Factors such as your credit score, income, and credit history determine your creditworthiness.
The main features of unsecured credit cards are as follows:
- Credit limit determined by lender: The credit card issuer extends a line of credit to you. Your amount of available credit will differ based on your creditworthiness, income, and credit history.
- Various interest rates: Depending on how exclusive your credit card is, you may encounter various interest rates. These rates tend to be lower than secured credit card rates. You can also access unsecured credit cards with a zero-interest promotional period.
- Annual fee: Most traditional credit cards have an annual fee, however, there are several no-fee options.
- Rewards: Many unsecured credit cards have reward programs, cashback options and other benefits. These can help you get special offers on things like groceries, airline tickets, and petrol.
In summary, an unsecured credit card works by extending a line of credit based on your creditworthiness without requiring a cash deposit. You can use the credit card to make purchases up to your credit limit. As with secured credit cards, you need to make monthly payments on the outstanding balance to remain debt-free and build credit. Now, let’s examine the pros and cons of unsecured credit cards.
The Pros Of Using An Unsecured Credit Card
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- Flexibility and convenience: Unsecured credit cards provide you with the flexibility to make purchases and payments without requiring a cash deposit as collateral.
- Rewards and perks: Many unsecured credit cards offer rewards programs, cashback options, and other perks. These rewards can include travel miles, cashback on purchases, access to airport lounges, and more.
- Potential for higher credit limits: The better your credit = the higher your credit limit.
Opportunity for credit card benefits: Unsecured credit cards often come with additional benefits, such as extended warranties, purchase protection, and travel insurance. These benefits can provide added peace of mind when making purchases or travelling.
The Cons Of Using An Unsecured Credit Card
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- Higher credit score requirement: If you have a low credit score, you may struggle to get approval for an unsecured credit card or get stuck with higher interest rates. If you have a good credit score, you are much more likely to get approval for an unsecured credit card.
- Potential for debt: Without the requirement of a cash deposit, it can be easier to accumulate debt with an unsecured credit card.
- Credit card fees: Unsecured credit cards often come with annual fees, late payment fees, and other charges. These fees can add up over time and impact the overall cost of your credit card.
In summary, unsecured credit cards offer more available credit, extra rewards and more flexibility than secured credit cards. However, they can be harder to acquire and may put you at risk for debt if not managed correctly.
The Difference Between Secured And Unsecured Credit Cards
Now that you know the main features of secured and unsecured credit cards, let’s see how they compare:
Secured Vs Unsecured Credit Card Comparison Table
| Feature | Secured Credit Card | Unsecured Credit Card |
|---|---|---|
| Collateral Requirement | Requires a collateral. | Does not require collateral. |
| Access to rewards | Has no access to extra rewards. | Has access to extra rewards. |
| Credit Limit | Determined by the deposit. | Determined by your creditworthiness and card issuer. |
| Credit Building | Helps build your credit, especially if it’s low or non-existent. As long as you pay your credit card bill every month. | Builds your credit regardless of where it is, as long as you pay your credit card bill every month. |
| Fees and interest rates | Comes with annual fees and higher interest. | Variable annual fees and interest rates. |
| Approval requirements | Easy to get, only requires a deposit as security. | Harder to get, and requires good credit and income to qualify. |
Both types of credit cards have their uses. Secured credit cards can help you get out of a rut and build good credit over time. If you opt for an unsecured credit card with a low credit score, you may end up paying much higher interest than necessary. This is why we recommend starting with a secured credit card if your goal is to build credit from scratch and not pay exorbitant interest fees if you miss a payment.
What Type Of Credit Card Is Right For You?
To see which type of credit card is right for you, you’ll first have to know your credit score and credit history. If you have your credit information, see our checklists below to see which credit card type is right for you.
A secure credit card will be a good choice if you have the following:
- A low credit score: This is any score under 579.
- A limited or non-existent credit history.
- Struggle with overspending and want to limit this.
- A minimum of $200 to deposit.
An unsecured credit card will be a good choice if you have the following:
- A fair or good credit score: This is any score over 580.
- A good credit history that demonstrates on-time payments and low credit
- utilization.
- Can stick to a budget.
- Credit-card-specific requirements (this will vary).
Whatever you choose, remember that you’ll get the most out of your credit cards if you manage them well. Never carry a balance, pay off your bills immediately or before the due date, and try to never use more than 30% of your available credit so your credit utilization remains low. Remember, credit cards are financial tools that can help you qualify for loans and additional benefits later on, so make the right decisions for your future self now.
