Secured Credit Cards vs Unsecured Credit Cards

Whether you're rebuilding credit after a financial setback or it's your first time applying for a credit card, it can be difficult to get approved for a new credit card with an average to poor credit score. Without a credit card, simple tasks such as renting a car or reserving a hotel room become more complicated.

It seems like a catch-22 – it can be hard to get approved without a solid borrowing history, but unless a card issuer is willing to offer you credit, how are you supposed to build your credit score?

Applying for a secured credit card may help. With responsible use, a secured credit card may help you establish a stronger credit history and build your reputation as a borrower who may be a suitable candidate for other types of loans.

1. What is a secured credit card?

A bank that offers a secured credit card requires the applicant to make a cash deposit before it will open the credit card account. This cash deposit is called collateral. If the cardholder uses the credit card but doesn't make the payments as promised, then the card issuer can keep the cash deposit.

This arrangement protects the card issuer from default. But if the cardholder makes payments as promised and otherwise abides by the cardholder agreement, then the card issuer will report those timely payments to the credit bureaus. That's how people with new or poor credit histories can use a secured credit card to rebuild their credit.

Getting a secured credit card may be a smart and strategic choice for those who want to rebuild their credit following a financial difficulty, such as a bankruptcy or foreclosure. But because secured credit cards may also help borrowers with limited credit histories, they may also be suitable for recent college graduates, new citizens, and others who have never been approved for a loan. Read How to Help Build Credit and 4 Steps To Help Build Credit With No Credit History for more information.

2. What is an unsecured credit card?

An unsecured credit card doesn't require the cardholder to give the card issuer a cash deposit. For this reason, unsecured credit card issuers are more selective during the application process, and they may require higher credit scores for approval. That's because card issuers prefer applicants who have established a credit history of repaying debts on time and as promised.

3. What is the difference between secured and unsecured credit cards?

The core difference between a secured credit card vs an unsecured credit card is the cash deposit that secured credit cards require.

Aside from this initial cash deposit, secured and unsecured credit cards work in similar ways. A cardholder can spend up to the credit limit established by the card issuer, provided the cardholder makes regular, on-time payments and abides by other cardholder agreement terms. Secured and unsecured cardholders can also use their credit cards anywhere that accepts them, provided they don't spend over their personal credit limit.

Individual cardholder terms vary widely between all types of credit cards, whether they use secured or unsecured credit cards. Two cardholders may qualify for slightly different terms even while holding the same credit card from the same issuer, based on multiple factors including their credit scores. For example, different cardholders often pay different interest rates, and some cardholders have higher credit limits than others.

4. How much is the deposit for a secured credit card?

How much of a deposit is required depends on a wide variety of factors, but banks that offer secured credit cards can require collateral ranging from $300 to $5,000. In many cases, the size of the deposit is equal to the size of the credit limit. That means an applicant who is granted a $500 secured credit card limit may need to give the credit card issuer $500 in cash, up front, as collateral.

If the secured cardholder abides by the terms of the cardholder agreement and establishes a responsible borrowing history, the card issuer might offer the cardholder the opportunity to apply for an unsecured credit card. If this occurs and the cardholder accepts the terms of the new unsecured credit card agreement, then the card issuer may return the security deposit to the cardholder.

5. How can a secured credit card help rebuild my credit history?

Regular, on-time payments play an important role in building a good credit score. Therefore, a secured credit cardholder who establishes a pattern of making regular, on-time payments can help build – or rebuild – credit history.

Other factors also play a part in in building credit, so make sure you understand how credit works before applying. Read How To Start Building Credit When You Have No Credit History for more information.

Finally, as you consider a secured credit card, make sure that the card issuer reports your activity to the credit bureaus. Card issuers that report to credit bureaus give you the best opportunity to establish or rebuild your credit history.

6. Secured credit cards vs unsecured credit cards: Which should you choose?

Choosing a secured vs unsecured credit card depends on what you plan on using your credit card for primarily.

For people looking to build or rebuild their credit score, a secured credit card is a great tool to help you achieve that while also offering many of the same benefits as an unsecured credit card.

For applicants who already have a strong credit history, an unsecured credit card has the advantage of not needing an initial deposit, as well as greater variety in rewards and perks.

Before applying to a secured or unsecured credit card, consider the card’s terms and conditions carefully and be sure that the card aligns with your spending habits and goals.

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