Getting a credit card and using it responsibly is one way of establishing your credit history or improving your credit score. There are two types of credit cards – secured and unsecured credit cards. They share a lot of similarities but they also have key differences. If you’re unsure which one to choose, you need to know how each type works, how to apply, how to use, their pros and cons, and how each one helps build your credit. Let’s dive in!
What is the Difference Between Secured and Unsecured Credit Cards?
Secured and unsecured credit cards share a lot of similarities. They can be used to make purchases online or offline and can help build credit history (positive and negative). In terms of their differences, unsecured credit cards are ideal for consumers with good credit while secured credit cards are for those with thin or no credit history and bad credit.
Here’s a table showing the differences between secured and unsecured credit cards.
Unsecured Credit Card
Secured Credit Card
can be used for online and offline purchases
can be used online and offline purchases
Can help build credit
Can help build credit
Does not require a security deposit
Requires a security deposit
Ideal for consumers with at least a good credit history
Ideal for consumers with thin or no credit history, bad credit history
Low interest rates
Higher interest rates than unsecured credit card
Credit limit depends on factors such as income and credit score
Credit limit depends on the security deposit
What is an Unsecured Credit Card?
Issuers of unsecured credit cards check the applicant’s credit score and credit history to determine their creditworthiness. You need to have at least a good credit score of 670 (FICO) or a fair credit score of 601 (VantageScore) to have higher chances of getting approved for an unsecured credit card. Lenders feel more comfortable approving applicants with good credit scores because they’re more likely to pay back the amount they owe. That’s why they don’t require a security deposit and offer lower interest rates.
How Does an Unsecured Credit Card Work?
Various financial institutions, such as banks like Capital One and Citi, and credit unions, such as Hughes Federal Credit Union and Henrico Federal Credit Union, offer unsecured credit cards. When you apply for one, you need to provide some personal information and agree to a credit check. As mentioned earlier, you need to have a good credit score to have a reasonable interest rate.
Unsecured credit cards fall under revolving credit accounts. Basically, you can spend up to a certain credit limit and you can choose to pay off your credit card balance in full or revolve it to the following month. You won’t pay any interest if you pay your credit card balance in full. If you don’t, you’ll pay interest and you’re required to make a minimum payment every month, depending on the terms you’ve agreed on with the credit card issuer. However, there are a number of caveats concerning only making minimum payments. Paying only the minimum amount means you’ll pay more interest over time and you’ll be in debt much longer. A lot of people who spend too much using their credit card and make only the minimum payments, end up filing for bankruptcy because they can no longer pay their debt. That’s why you have to pay your balance in full every month if you can.
What are the Advantages of Using an Unsecured Credit Card?
The most common type of credit card is the unsecured credit card. It offers several benefits.
- Higher Credit Limit. Having a good credit score comes with several advantages. When it comes to unsecured credit cards, a good credit score means you’re a low-risk borrower and creditors trust you more. As such, you’ll be given a higher credit limit compared to a secured credit card.
- Lower APR. Another perk of having a good credit score is enjoying a lower APR (Annual Percentage Rate). Unsecured credit cards come with low-interest rates if you have a good credit score. However, the average APR of credit cards, which ranges from 15.53% to 22.76%, is still higher than personal bank loans, which can range from 3% to 36% so it makes great financial sense to pay your monthly bills fully every time.
- More Card Options. Various financial institutions offer unsecured credit cards with different perks, interest rates, and payment terms. Finding one that meets your needs will be easy.
- Rewards. Credit card issuers want consumers to use their cards regularly and that’s why they offer rewards, such as cash backs, discounts, miles for travel, and in some cases a limited-time offer of 0% APR on certain purchases.
- Reports To Credit Bureaus. Your credit card payments are reported to the major credit bureaus (Experian, TransUnion, Equifax). You can easily boost your credit score if you pay on time. However, missed and late payments will drag your credit score down. That’s why you need to become a responsible credit card owner and make timely payments.
What are the Disadvantages of Using an Unsecured Credit Card?
- Different requirements. Credit card issuers have different requirements for their unsecured credit cards.
- Additional fees. There are other fees that you need to cover when you have an unsecured credit card. You may have to pay an annual fee that ranges from $20 to $200 although some banks will waive the fees if you meet a certain level of spending each year. Other additional fees include cash advance fees, payment fees, and balance transfer fees.
Are there Unsecured Credit Cards for Bad Credit?
Yes, there are unsecured cards for bad credit, such as Petal® 2 Visa® Credit Card, Credit One Bank® Platinum Visa®, and Capital One® Platinum Credit Card. However, unsecured credit cards are not ideal for building credit. Issuers may charge high-interest rates and fees for unsecured card users with bad credit. If you’re already struggling financially, paying high-interest rates will only worsen your situation. You may end up going deep into debt and ruining your credit score even more.
How Does a Secured Credit Card Work?
Remember, a secured credit card is an excellent credit building too. If you’re looking to rebuild your credit, make sure you use the card only when needed. Don’t forget to pay off your balance in full every month on or before the due date. Always make timely payments and you’ll see improvements in your credit score, over time.
What are the Benefits of a Secured Credit Card?
- Higher Chances of Approval. You’ll have better chances of getting approved for a secured credit card if you can’t get a traditional credit card. Since you’re paying a security deposit, the risk is shifted to you instead of the credit card issuer.
- No Credit Checks. Some credit card issuers forgo credit checks when assessing applicants. Some no credit check secured credit cards include OpenSky Secured Visa Credit Card and First Progress Platinum Prestige MasterCard Secured Credit Card. Even though the issuer conducts a credit check, you still have a chance of getting approved because you’ll be paying a security deposit.
- Refundable Security Deposit. You can get your security deposit back if you pay your balance in full and you decide to close your credit card account.
- Credit Building. Although you can get an unsecured card for bad credit, you’ll have to pay steep interest rates and keep up with a small credit limit. That’s why secured credit cards are preferred when it comes to credit building. Since you’ll put down a security deposit, you’ll have higher chances of getting approved even if you have a poor credit history.
- Prevents You From Going Into Debt. Since you have a smaller credit limit, you can’t go on a shopping splurge, which could get you into debt.
- Your Balance Won’t Get Sent To Collections. The credit card issuer will use your security deposit in case you default on your payments. Because of that, your balance won’t be sent to a collection agency unless the amount you owe is more than your security deposit.
What are the Disadvantages of a Secured Credit Card?
- Security Deposit. You need to pay a security deposit if you want to get a secured credit card. This could be a disadvantage if you don’t have extra money to spare.
- Smaller Credit Limits. The credit limit for a secured card is the amount you pay for your security deposit.
- Additional Fees. Just like an unsecured credit card, secured credit cards have additional fees, too, including annual fees and monthly maintenance fees. These fees are non-refundable and may add to the overall cost of the secured credit card, which can add to the financial burden if you’re struggling with your finances.
- Not All Reports To Credit Bureaus. Some secured credit card issuers don’t report payment activities to reporting bureaus. It may negate your efforts if you’re trying to rebuild your credit. You have to make sure that the issuer will report all your account activities when you apply for a secured credit card.
Should You Choose a Secured or Unsecured Credit Card?
If you already have good credit and you’re looking for a credit card that can help you maintain or increase your credit score then an unsecured credit card is a perfect choice. On the other hand, if you have a thin or no credit file at all or you’re currently struggling with your bad credit, an unsecured credit card is just what you need to build your credit.
Can you Transition from a Secured Credit Card to an Unsecured Credit Card?
A secured credit card can help you build your credit but it’s not an ideal long-term credit-building tool. You’ll have to shift to an unsecured credit card once you improve your credit score and enjoy a bigger credit limit without having to pay a security deposit.
How you can move from a secured credit card to an unsecured credit card will depend on the credit card issuer. Some issuers, such as Discover, will review your account and determine if you’re eligible for an unsecured line of credit. Some credit card issuers don’t offer a transition process. In that case, you have to apply for an unsecured credit card and close your secured credit account.
Unsecured credit cards are common and widely used by countless consumers. This type of credit card is a good option for those with good credit and looking to maintain or increase their credit score. If you have bad credit or if you have a thin credit file or no credit at all, you can still get a credit card. However, unlike the traditional unsecured credit card, you’ll need to pay a security deposit to get a secured credit card, which is an excellent short-term credit-building tool. You may be able to get an unsecured credit card even with bad credit but you need to be ready to pay high-interest rates and fees. So, be sure to weigh your options first and consider the pros and cons of each type of credit card before you submit an application.