Secured vs. Unsecured Credit Cards: What’s the Difference?

Introduction

Think a secured credit card might be right for you? Confused about the differences between secured credit cards and unsecured credit cards? Unsure which credit card is the best choice for you?

Secured credit cards and unsecured credit cards can both offer notable benefits, but they’re designed for people in different financial situations. Before you decide whether a secured or unsecured credit card is in your future, it’s important to consider several key factors.

What Are Secured Credit Cards? 

Secured credit cards normally require you to put down a refundable deposit to be used as collateral on the account before you can use it. In most cases, this deposit amount will be the same as the credit limit on your card, although this can vary depending on your card issuer and credit history.

If you make your payments on time, every time, and the account stays open, the card issuer shouldn’t need to touch your deposit. Your deposit will typically be refunded once you’ve paid your account balance in full and closed the account.

In some cases, you can earn a higher credit limit from your card issuer after consistently making on-time payments for a certain period of time. While secured credit cards don’t typically offer the same variety of rewards as unsecured cards, they can be financial lifelines for people with little or no credit.

Pros and Cons of Secured Cards

Secured credit cards can be useful financial tools for people who are new to credit or working to rebuild it. However, they also come with limitations that are important to understand before applying.

Pros

May be available to people with a limited credit history: Secured cards are often easier to qualify for than unsecured cards, making them accessible to first-time borrowers or those working to rebuild their credit.

May help someone build credit over time: Making on-time payments and keeping balances low can help establish or rebuild a positive credit history.

May help curb overspending: Because your credit limit is usually tied to your deposit amount, secured cards can encourage more controlled spending.

May allow cardholders to upgrade to an unsecured card: Some issuers offer a path to upgrade to an unsecured card after a period of use, potentially returning your deposit.

Cons

Require a deposit to qualify: The upfront deposit can be a barrier for people who don’t have extra cash available.

May have higher fees and interest charges than unsecured cards: Some secured cards charge annual fees or higher APRs, which can increase the cost of borrowing.

May not offer as many rewards or benefits: Secured cards typically have limited or no rewards compared to unsecured options.

What Are Unsecured Credit Cards?

Unsecured credit cards don’t require you to put down any collateral or security deposit. While unsecured credit cards are more common than secured credit cards, they can be more difficult to obtain and less accessible to people with poor credit. This is because unsecured cards pose a bigger risk to issuers than secured ones.

Card issuers will usually review factors like credit history, credit score, and income when determining eligibility for unsecured credit cards. Applicants need to be seen as likely to pay the issuer back in order to qualify. Unsecured credit cards are commonly available for people with credit scores ranging from good to average, although interest rates and fees can vary.

Pros and Cons of Unsecured Cards

Unsecured credit cards are the most common type of credit card and can offer significant value to borrowers who qualify. Still, they’re not without drawbacks.

Pros

May have higher credit limits than secured cards: Approved applicants often receive higher credit limits, which can improve flexibility and credit utilization ratios.

Many cards offer rewards and perks: It’s more common for unsecured credit cards to provide rewards on your spending or travel benefits.

Can help build your credit history: Regular on-time payments and responsibly managing your balance can strengthen your credit.

Doesn’t require a security deposit: Since there’s no upfront deposit, unsecured cards may be less expensive to open initially.  

Cons

May have credit history or credit score requirements: Borrowers with limited credit history or in the lower credit score ranges may not be approved.

Higher credit limits may offer opportunities for overspending: Without careful budgeting, it can be easier to carry high balances and end up paying more in interest.

How Do You Apply for Secured and Unsecured Credit Cards?

The application processes for secured and unsecured credit cards are fairly similar, but they can differ in some notable ways. When you apply for a secured credit card, the card issuer may or may not check your credit history before deciding whether to approve you for their card. When applying for an unsecured card, the card issuer generally will check your credit history. Checking your credit generates a hard inquiry on your credit report, which can temporarily affect your credit score.

During this process, it’s important to remember that you’re not guaranteed to be approved for a secured credit card just because you’re providing collateral. Depending on the card issuer, there may be some financial lapses from your past or circumstances from your present life that they’re not willing to overlook. 

Reasons for being denied could include, but are not limited to, having a bankruptcy, insufficient income, just starting a new job, or a less-than-positive payment history on current accounts like student loans. To avoid any unpleasant surprises, you should always review your financial history before applying for any new credit card.

If you’re approved for a secured credit card, unlike with an unsecured credit card, you’ll typically be required to make a security deposit before you can use the card. Some secured credit cards require your deposit when you apply for the card, while others require you to make your deposit after you receive the card but before it can be activated.

How Do Secured and Unsecured Credit Cards Work?

Once activated, secured and unsecured credit cards work pretty much the same. You make purchases with the card and receive a statement at the end of your billing cycle. Then you’re required to make at least the minimum payment and to ensure that the card issuer receives your payment by the payment due date.

Just like with an unsecured credit card, your secured card may or may not have a grace period. If it doesn’t, you’ll be required to pay interest on all of your purchases.

If it does have a grace period, you will not be charged interest as long as you pay the full balance before the due date. If you don’t pay off the balance in full before the due date, you will be charged interest (at an APR specified in your credit card agreement) on any balance still owed, plus any new charges, after your payment is deducted.

Do Unsecured or Secured Credit Cards Have More Fees?

Secured credit cards often come with fees similar to unsecured cards, including application fees, late payment fees, annual fees, and more.

If you miss a payment or pay less than the minimum amount due with a secured credit card, that amount is not deducted from your security deposit. The card issuer holds that deposit in a separate reserve account as collateral. A missed or short payment will be considered past due, and you will still owe any outstanding amount plus any fees and interest.

It’s only after you default and the card issuer closes your account that they deduct any amount you owe them from your deposit. But you don’t want things to get to that point — especially if you acquired a secured credit card to help you build a positive payment history.

With unsecured credit cards, you may not stand to lose a security deposit, but the impact on your credit could still be costly. Repeatedly missing payments on an unsecured card can damage your credit score and could lead to higher fees and interest rates. Regardless of the card you have, you should always make every effort to pay at least the minimum amount due on time, every time.

Are Secured or Unsecured Cards Better for Building Credit?

If you have less-than-perfect credit and are looking to start rebuilding it by creating a positive payment history, which is the most important factor in determining a credit score, then a secured credit card could be the way to go.

Maybe you have no credit score at all. You could be a college student, a fresh college graduate, a recent immigrant or someone who just never bothered to apply for credit before. These are all situations where choosing a secured credit card could be a good idea.

Since no credit history typically means no credit score, a secured credit card could be the first step of your credit journey. Responsible use of a secured card could pave the way to an unsecured credit card or other forms of credit down the road.

If you’re getting a secured credit card to help you build a positive payment history, it’s critical you verify that the card issuer for the secured card you’re applying for reports your activity on the account. If they don’t, then that particular card is not going to help you build or rebuild your credit.

Some card issuers may only report monthly to one or two of the major credit bureaus instead of all three, while others may report to any or all of the bureaus every few months instead of monthly.  

Still others may not report your activity at all, because it’s not mandated by law that secured credit cards — or unsecured credit cards — report your information. Even worse, some card issuers may only report derogatory information, such as late payments, which only helps you to build a negative payment history.

What Are the Main Differences Between Secured and Unsecured Credit Cards?

While secured and unsecured credit cards function similarly in day-to-day use, there are important differences that can influence which option is best for you.

Deposits

An unsecured credit card doesn’t require you to deposit money upfront. A secured credit card, on the other hand, requires a deposit of funds that the issuer holds as collateral.

Credit limits

With a secured card, your credit limit will typically be equal to or close to your deposit amount. If you pay off your balance in full each month, your available credit remains intact. If you carry a balance, your available credit will decrease accordingly.

Credit limits for unsecured cards tend to be much higher and are based on your credit history. You might start with a lower limit and become eligible for increases after a year or two of responsible use.

Credit score requirements

Secured cards often have more flexible approval criteria, while unsecured cards generally require a higher credit score. The stronger your credit profile, the more likely you are to qualify for an unsecured card with favorable terms.

Rewards and benefits

Unsecured credit cards typically offer more varied rewards and benefits, such as cash back, travel points, and other perks. Secured cards may offer limited cash back rewards, but these benefits are usually less generous than those available on unsecured cards.

How to Choose Between a Secured and Unsecured Credit Card

Before applying for a secured or unsecured credit card, it’s important to evaluate your financial situation to determine which option is best for your needs.

Financial needs or goals

Life can be challenging without a credit history, which may affect your ability to rent an apartment or finance a car. If your immediate goal is to build or rebuild credit, a secured card may be the better option. If you already have a decent credit history and want more flexibility and rewards, an unsecured card could be the right choice.

Fees, interest rates, and approval odds

Some unsecured cards may charge annual fees, which are often around $50 or $100. You’ll need to decide whether the rewards and perks justify the cost. If you carry a balance, consider the APR and how it will impact your monthly payments. Small differences in interest rates can add up over time.

Keep in mind that applying for a credit card usually results in a hard inquiry on your credit report, which may temporarily lower your score. Some issuers offer prequalification tools that use a soft inquiry, allowing you to check your likelihood of approval without affecting your credit.

Perks, benefits, and rewards

Cash back offers, airline miles, introductory APRs, and balance transfer options can all add value, depending on your lifestyle and financial habits. If you’re considering a secured card, find out whether the issuer offers automatic upgrades to unsecured cards or if you’ll need to apply separately in the future.

Bottom Line

Secured and unsecured credit cards are distinct products for different financial situations. An unsecured card may be the right choice if you have a foundation of established credit history, while a secured card could help you rebuild credit history — or build it in the first place.

If you’re interested in getting a secured card, you can see if you pre-qualify for a secured card from Credit One Bank — checking to see if you’re pre-qualified is free and will not harm your credit score.

FAQs About Secured and Unsecured Credit Cards

Does a secured or unsecured credit card build credit faster?

Both types can help build credit at the same pace if the issuer reports activity to the credit bureaus. Consistent on-time payments and low balances matter more than the card type.

Is it better to have a secured credit card or an unsecured one?

Neither is universally better. It depends on your credit history and financial goals. Secured cards are often better for beginners or rebuilders, while unsecured cards suit borrowers with established credit.

Do you ever get your money back from a secured credit card?

Yes. If you close the account in good standing or upgrade to an unsecured card, your deposit is typically refunded after any remaining balance is paid.

How long does it take for a secured credit card to become unsecured?

The timeline varies by issuer, but many review accounts after six to twelve months of responsible use to determine eligibility for an upgrade.

Will a secured card raise my credit scores?

A secured card can raise your credit scores over time if you make on-time payments, keep balances low, and the issuer reports to the credit bureaus.

Can I get denied a secured credit card?

Yes. Although approval standards are often more flexible, issuers may still deny applicants due to factors like missed payments, recent bankruptcies, or negative account history.