You’ll come across both secured and unsecured cards when looking for a credit card. But what do they mean?
Before we get into the differences between secured and unsecured credit cards, let’s first talk about how a credit card works.
Credit cards and collateral
When you use an unsecured credit card, you’re not spending your own money right away. Instead, you’re borrowing money from your bank. In that sense, each time you use the card you’re taking out a loan that you’re expected to pay back in order to maintain a trustworthy credit history.
For a secured credit card, you’re required to put down collateral as security in order to get a credit limit. Collateral can be anything of value — typically money — that you offer to your lender. If you fail to repay your loan, your lender can seize your collateral.
Secured credit cards explained
When you open a secured credit card, you must provide your lender with a security deposit — typically $200 to $500 (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 an increase in your score over time and can graduate to an unsecured credit card. Just make sure your card provider reports your payments to all three major credit bureaus.
Why do card providers require collateral?
You may be new to credit or have a damaged credit score. In these cases, lenders tend to view you as a riskier borrower. Collateral guarantees the provider will be repaid, making them more willing to lend.
Pros and cons of secured credit cards
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Everything you need to know about secured credit cards
Compare secured credit cards
Unsecured credit cards explained
When you open an unsecured credit card, you won’t have to put down a security deposit.
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 like your income and payment history. Ultimately, the credit limit they offer you is the amount they feel you can borrow responsibly.
The importance of your credit score
Your credit score will determine many aspects of your financial future such as applying for credit cards, personal loans and your ability to take out a mortgage for a home.
When it comes to credit cards, you’re better off applying for an unsecured card so you can go without putting down a security deposit — you’ll typically get better interest rates too. However, this advice tends to apply for people with a good to excellent credit score of 680 or higher.
If you have fair credit — generally 620 to 679 — you may still qualify for an unsecured card. But the ones you qualify for will likely come with higher fees, shadier terms and less favorable interest rates. You may be better off getting an excellent secured card, building or rebuilding your credit score and then moving on to a reputable unsecured card.
How can I learn what my credit score is?
If you haven’t yet requested your credit report from Experian, Equifax or TransUnion this year, you are entitled to a free copy of your credit report annually — this will include your credit score along with your credit history.
Other options include submitting a request to a score service or reporting company directly. Some services require that you sign up for a monthly subscription service, while others require a one-time fee.
Requesting your credit score from a third party service will require a soft pull, this inquiry may appear on your credit report but it will have little to no affect on your score.
Pros and cons of unsecured credit cards
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Which card should I pick?
When deciding between a secured and unsecured card, start with your credit score.
- If your credit score is 680 or higher, you likely have good to excellent credit. An unsecured card is an excellent choice.
- If your credit score is between 620 and 679, you have fair credit. You’ll still qualify for some unsecured cards, but the terms may not be very good. For better terms, consider applying for a secured card instead.
- If your credit score is below 620, you have fair to poor credit. You probably won’t be approved for an unsecured card, so a secured card may be a better option. If your credit score is severely damaged, consider a secured card with no credit check.
Switching from a secured to an unsecured credit card
