Whether you decide on an unsecured credit card or a secured one depends on your personal financial needs. Those with relatively healthy credit might want an unsecured card for perks such as a cashback or travel credits. Those with poor or no credit, however, might consider a secured card.
Secured credit cards are marketed to people with bad or no credit. But, at the same time, there is some standard, unsecured cards marketed to consumers with fair credit who have had trouble being approved for prime credit card accounts.
Why, then, would someone choose a secured credit card when they might get approved for an unsecured card—that doesn’t require a security deposit—instead?
To clear up the confusion, let’s take a look at the difference between a secured and unsecured credit card.
When you open a secured credit card, you must provide your lender with a security deposit — typically $200 to $500, though lower deposits are available.
This deposit acts as collateral in case you fall behind on your payments. The amount of your security deposit is also your credit limit.
A secured credit card offers the opportunity to build your credit score. If you consistently make your card payments on time, you’ll see a gradual increase in your score, and, eventually, you can graduate to an unsecured credit card.
Just make sure your card provider reports your payments to all three major credit bureaus.
Pros and Cons of Secured Credit Cards
- Get one even if you have new or damaged credit.
- You set your credit limit.
- Secured cards can come with low deposit requirements and no annual fee.
- Rebuild your credit score.
- You must put down a security deposit.
- Cards typically come with high interest rates.
- Credit is limited by your deposit.
- Cards tend to offer few rewards.
When you open an unsecured credit card, you won’t have to put down a security deposit. Instead, you’re borrowing money from your bank.
In that sense, each time you use the card, you’re taking out a loan you’re expected to pay back in order to maintain a trustworthy credit history.
Typically, if your provider accepts you as a customer, it means they’ve accessed your credit history and are quite confident you’ll repay your debts. To determine your credit limit, your card provider will gauge your ability to repay.
They’ll look at factors such as your income and payment history. Ultimately, the credit limit they offer you is the amount they feel you can borrow responsibly.
Pros and Cons of Unsecured Credit Cards
- No security deposit required.
- Better rewards than secured credit cards.
- Cards typically come with lower interest rates than secured credit cards.
- Poor terms if you have weak credit.
- It can severely damage your credit history if you’re not managing the account responsibly.
Secured vs. Unsecured Credit Cards: What Are the Benefits?
There are benefits to both secured and unsecured cards, depending on what you need or want from a credit card.
Secured Cards Benefits
- Even those with bad credit can qualify: For those who need a way to get back on their feet, secured cards have few approval qualifications.
- Can help you build a good credit history: If you are new to credit cards, secured cards offer a deposit-protected and structured environment to build upon.
- Deposit is refundable: While paying a deposit to get a credit card isn’t convenient, as long as you keep your account in good standing and pay off your balances, you’ll get your initial deposit back.
Unsecured Cards Benefits
- Lower interest rates and fewer fees: Those with an established credit history and good-to-excellent credit scores can access cards that cost less over time than secured cards.
- Access to rewards programs: Large purchases and everyday expenses can actually earn you money back if rewards cards are used strategically.
- More cards to choose from: There are many more options and types of unsecured cards than secured cards. Whether you are looking for a card with low interest, rewards, balance transfer deals, or excellent travel benefits, you’ll have options.
- Higher credit limits: With better credit comes a higher credit limit. This can help you fund large purchases without maxing out the card or hurting your utilization ratio.
Secured vs. Unsecured Credit Cards: What Are the Drawbacks?
All credit cards should be used responsibly and applicants should read the terms and conditions carefully before opening an account.
Secured Cards Drawbacks
- Deposit requirements: A deposit of a few hundred dollars is a large one-time payment that could throw off an already tight budget. It’s refundable, but not necessarily convenient.
- Excessive fees: On top of the deposit, secured cardholders may face non-refundable fees such as annual fees, monthly maintenance charges, and even application processing fees.
- Low credit limits: Since secured card deposits typically become the card’s credit limit, if you can’t put down a couple thousand dollars, you won’t have a large credit limit. That means it’ll be even more important to watch your spending so your debt to available credit ratio doesn’t rise too high.
- Few to no rewards: Secured cards will cost you and you likely won’t get anything in return outside of the credit history and practice using credit wisely.
- Not all issuing banks report accounts to credit bureaus: This is a big one. If you have a secured card to improve your credit score and history, the account needs to be reported to the bureaus. Since this isn’t a given with secured cards, you’ll need to check to make sure before applying for Secured Credit Card?
Unsecured Cards Drawbacks
- Approval qualifications vary: Depending on the card, credit score requirements will vary. Even if you have been a responsible cardholder, you might not qualify for the very best rewards card. You’ll need to do some research to find a card that fits your needs and your credit score.
There really is no “best” pick between a secured and unsecured card. These cards serve different purposes and you’ll generally pick one based on your financial needs. In short:
- If you need help creating or building your credit score, you’ll apply for a secured credit card.
- If you want a credit card for earning rewards, cashback, or for other standard financial reasons, you’ll apply for an unsecured credit card.
If you have the means to obtain an unsecured credit card, that should be your first pick when it comes time to apply.
However, if you don’t have the credit or have a poor credit history, compare secured credit card options to find a card that can help you build credit for the future.
Spend responsibly and pay off your balance on time and you’ll soon be able to graduate to an unsecured credit card.
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