What Is a Secured Credit Card and How Is It Different From an Unsecured Card?

While you might think all credit cards work the same way, that’s not quite the case. When it comes to credit cards, there are actually two very different types to choose from – unsecured credit cards and secured credit cards.

Which type of card is best for your needs? At the end of the day, it depends on the strength of your credit score and where you are in the credit-building process. Keep reading to learn more about each type and how they are different.

What Is an Unsecured Credit Card?

The most popular and common type of credit card is an unsecured credit card. With this type of card, you’ll enjoy a line of credit you can use to make purchases and pay them down over time.

Since this type of card is “unsecured,” you don’t have to pay a deposit as collateral. With more risk placed on the card issuer, however, unsecured credit cards are harder to qualify for. Most of the time, qualifying for an unsecured credit card requires fair credit at a minimum, which is generally considered a credit score of 650 or higher. If you do qualify, unsecured credit cards are great for building credit since they report your credit movements to credit reporting agencies.

Unsecured credit cards are all different in their own way. Some offer travel rewards, cash back, or special promotions to customers who use them regularly and for certain purchases. Others offer lucrative benefits such as zero fraud liability, return protection, purchase protection, and travel insurance.

Many unsecured credit cards with lucrative benefits or rewards programs charge an annual fee for their use. Before you sign up for an unsecured credit card, make sure you understand its benefits and whether fees are involved.

Pros of Unsecured Credit Cards:

  • You access a line of credit without collateral.
  • Some unsecured credit cards offer travel rewards, cash back, or vendor-specific rewards programs.
  • Score additional benefits such as purchase protection, return protection, trip cancellation/interruption insurance, and auto rental coverage.
  • Unsecured credit cards help you build credit by reporting your payment history to all three major credit reporting agencies – Experian, Equifax, and TransUnion.

Cons of Unsecured Credit Cards:

  • Some unsecured credit cards charge an annual fee.
  • Unsecured credit cards with large credit limits make it easier to get into debt.
  • They aren’t easy to qualify for if your credit is average or poor.

What Is a Secured Credit Card?

Secured credit cards work differently than unsecured cards due to the fact they require collateral. To open a secured credit card, you should plan on putting down a cash deposit equal to your new credit limit. So if you put down a $500 deposit, for example, your credit line should be equal, or close to, $500.

While putting down a cash deposit may not sound ideal, secured credit cards offer a special opportunity for individuals with poor credit or thin credit profiles. Where unsecured credit cards can be difficult to qualify for, secured credit cards are fairly easy to get — after all, you’re not as big a risk to the bank since they can simply keep your deposit if you don’t pay your bill.

Once you qualify for a secured credit card, you can being using it to build your credit profile or improve your credit score right away. This is possible because, just like unsecured credit cards, most secured credit cards report your credit movements and payment history to the three major credit reporting agencies. If you use a secured credit card responsibly for a year or more, the card issuer may invite you to “upgrade” to an unsecured card.

If you can’t qualify for a traditional unsecured credit card, a secured credit card is a thoughtful alternative that can help you build credit — not to mention good credit habits. Since these cards are available to individuals with poor credit, however, they tend to come with higher fees and interest rates. Also, secured credit cards are a lot less likely to offer any rewards or additional perks.

Pros of Secured Credit Cards:

  • You can usually qualify, even with bad credit.
  • Most secured credit cards report your payment activity to the three credit reporting agencies – Experian, Equifax, and TransUnion – allowing you to build up your credit history and improve your credit score.
  • Enjoy the convenience of a credit card.

Cons of Secured Credit Cards:

  • You must put down a cash deposit as collateral.
  • Credit limits are low.
  • Higher fees and interest rates are usually involved.
  • You may not get any rewards.

Final Thoughts

If you can qualify for an unsecured credit card, that’s probably your best bet. With an unsecured credit card, you won’t have to put down a cash deposit. As an added bonus, you may qualify for a card that offers cash back, travel rewards, and additional benefits that make it more valuable.

Still, a secured credit card can help you improve your credit when you’re not ready to qualify for a traditional unsecured card. If you use your secured card long enough and responsibly enough, you may even improve your credit enough to upgrade to an unsecured card. As long as you don’t default or miss payments, you’ll also recoup the initial deposit made on your secured credit card once you close your account.

The best credit card for you depends on your current score and credit goals. With either option, you can start on the path towards excellent credit in no time.

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