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CREDIT CARDS

Secured vs. Unsecured Credit Cards: Which Is Better?

EXPECTED READ TIME: 7 MINUTES

Getting a credit card isn’t always easy, especially if you don’t have much credit or your credit isn’t so great.

One alternative is to open a secured credit card. Designed for people with weaker credit, secured cards offer the same convenience as regular (unsecured) credit cards but often come with easier approval.

In fact, for many, a secured credit card is the first step in building a heathy relationship with credit — and it might be a good fit for you, too.  

Infographic of Secured vs. Unsecured Credit Cards

What Is the Difference Between a Secured and Unsecured Credit Card?

The main difference between secured and unsecured credit cards is that secured cards require you to put down a security deposit. This deposit often establishes the card’s spending limit, and it protects the lender if a borrower is unable to pay their credit card bill.

Secured credit cards are easier to get approved for because they are backed by collateral, making them safer for lenders. They come with higher interest rates, lower credit limits, and fewer rewards than unsecured cards, but they can be a good option for people who are establishing credit for the first time or repairing poor credit.  

Not sure which rewards card is right for you?

Most credit cards are unsecured, meaning that you can make payments or borrow money (in the form of cash advances) without ever putting up collateral. They often have fewer fees, higher credit limits, and better rewards programs. But you will need a higher credit score to qualify.  

Some secured cards can be upgraded to unsecured cards if you establish a good payment history over time. Secured credit cards can help build your credit score just like unsecured cards and other forms of debt. It all comes down to careful management and steady repayment.

Secured Credit Cards Unsecured Credit Cards
Requires deposit No deposit required
Easier approval Harder approval
Higher interest rates Lower interest rates
More fees Fewer fees
Lower credit limit
Higher credit limit
Few or no rewards Variety of rewards programs available
Can help build or repair credit score
Can help build or repair credit score

How Do Secured Credit Cards Work?


Often with secured cards, your credit limit is tied to your security deposit. Let’s look at an example of how a $200 secured credit card works. To open the card, your lender will require you to put down $200 as your security deposit. Once that’s paid, you can pay for gas, groceries, and anything else as long as you don’t spend more than $200.

 

Secured credit cards are easier to get approved for because they are backed by collateral, making them safer for lenders.

With your deposit in place, you can use your card anywhere that accepts cards in your network (for example, Visa®, MasterCard®, Discover®, American Express®). You can even enjoy the same features as unsecured cards, such as tap to pay and the ability to add your card to a digital wallet.

The security deposit on a secured credit card doesn’t take the place of monthly bills. You’ll still receive a statement with your balance and interest charges each month, and if you carry a balance from month to month then you’ll be charged interest. Whenever you close the card or transition to an unsecured credit card with the same lender, you’ll get your deposit back as cash or a statement credit.  

Here’s how to use a digital wallet and why you should have one.

How Do Unsecured Credit Cards Work?

Unsecured cards are much more common than secured cards — so much so that when most people hear the phrase “credit card,” they automatically assume you mean an unsecured card. Unsecured credit cards don’t require you to put down a deposit to use them.  

Many credit card companies require cardholders to have higher credit scores and a good credit history to open an unsecured credit card. (There are a few other steps you can take to better qualify for a credit card, too.) These cards usually come with better benefits like higher credit limits, lower interest rates, and better rewards. 

Unsecured cards usually come with better benefits like higher credit limits, lower interest rates, and better rewards.

Do Secured Cards Build Credit Faster?

Credit cards are one of the fastest ways to build credit, with some people reporting positive increases in as little as six months. That’s because your card issuer will report your payment habits to the credit bureaus every month. Over time, all those reports build your credit history. And if you’re making regular, on-time payments, then your credit score will keep increasing.

Credit cards are one of the fastest ways to build credit, with some people reporting positive increases in as little as six months.

Secured credit cards don’t build your credit any faster than unsecured credit cards. In fact, there’s no difference in how secured and unsecured credit cards impact your credit score. But for people with poor credit, secured cards can be one of the most accessible ways to rebuild their credit. 

Pros and Cons of a Secured Credit Card


Even though unsecured credit cards are more popular, there are a lot of advantages to secured credit cards. Here are just a few:  

Pros of Secured Credit Cards
Cons of Secured Credit Cards
Easier to get approved Must have money for a starting deposit
Can get your starting deposit back May pay higher interest
Can help build or repair credit Lower credit limits

Approval

Getting approved for a secured credit card is easier, but you will need to get together money for a security deposit.

Security Deposit

You’ll have to make a security deposit to open your secured card, but you can get it back if you’re in good standing and decide to close your secured card or upgrade to an unsecured card with the same card issuer.

Fees

Secured cards, just like unsecured cards, come with fees such as annual fees and maintenance fees. However with some know-how, you may be able to avoid common credit card fees.

Here are eight common credit card fees you can avoid.

Interest

Secured credit cards usually charge higher interest rates than unsecured cards.

Build or Repair Credit

Secured credit cards can be a great way to build or repair your credit because your monthly payments will be reported to credit bureaus. This makes them different from prepaid credit cards that function more like debit cards.

Rewards

A limited number of secured credit cards offer rewards, but these are much more common with unsecured credit cards.

Lower Credit Limits

Secured credit cards have lower credit limits than unsecured cards. In many cases, your credit limit is tied to the amount of your security deposit.

Secured credit cards can be a great way to build or repair your credit because your monthly payments will be reported to credit bureaus.

Pros and Cons of an Unsecured Credit Card

There are distinct advantages to unsecured credit cards, but they also carry some risks. Here are a few things to consider when you’re thinking about opening an unsecured credit card:

 

Pros of Unsecured Credit Cards
Cons of Unsecured Credit Cards
No deposit required Harder to get approved
Lower fees than unsecured cards Higher fees than other forms of borrowing
Can help improve your credit May require credit to already be established
Usually offer better rewards  

No Deposit

Unsecured credit cards don’t require a deposit.

Harder to Get Approved

It’s harder to get approved for an unsecured credit card than a secured card. However, it’s easier to get approved for an unsecured credit card than other types of credit (like personal loans).

Fees

Unsecured credit cards have lower fees than secured cards, but their fees are higher than on other forms of borrowing like personal loans or HELOCs.

Unsecured credit cards have lower fees than secured cards.

Impact on Credit

Both secured and unsecured credit cards can help you improve your credit if you manage them carefully. However, you may need to already have some credit history to get approved for an unsecured credit card. Most secured credit cards do require a hard credit inquiry as part of the approval process, just like with unsecured cards. There are a few options for secured cards that do not, though.

Better Rewards

Some secured credit cards do offer rewards like discounts at certain restaurants or reward points for purchases. Unsecured cards usually offer better rewards and give you more reward types to choose from.

Unsecured cards usually offer better rewards and give you more reward types to choose from.

Is a Secured or Unsecured Credit Card Better?

Both secured and unsecured credit cards have their benefits. If you’re starting to build credit for the first time or rebuilding your credit, a secured card might be just the tool you’re looking for to reach your financial goals.

Need help with your PenFed credit card? Try our help center.

The Takeaway

Your financial situation is as unique as you are. While an unsecured credit card offers many benefits, a secured credit card has its place, too. It might just be the right tool for building — or rebuilding — your credit and moving you closer to your financial goals.

Please note, PenFed does not offer a secured credit card at this time.

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