Secured Vs Unsecured Credit Card: How To Choose the Best Option for You

August 24, 2022
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Credit Cards
Security

Secured vs unsecured credit cards – wondering which one you should go for?

While both allow you to spend on purchases and are widely accepted, there is a difference between secured and unsecured credit cards.

From financial rewards to fees, interest rates, and credit limits, the card you choose can impact how you build your credit and how you benefit from making purchases, not to mention you usually need to meet certain requirements to apply for a specific card type!

Let’s get into the nitty-gritty of secured vs unsecured credit cards.

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

The most important difference between these two credit card types lies in the application process.

When you apply for a secured credit card, you need to put down a security cash deposit. Unsecured credit cards, on the other hand, are what we usually refer to when we speak of credit cards in general. While no security cash deposit is required, opening a credit account is harder because you need to have a good credit score already.

This isn’t all, though! Both credit card types have different benefits and are best for different kinds of needs.

Read further for a deep dive into the specifics of both secured and unsecured credit cards.

Secured Credit Cards: What You Need to Know

How does a secured credit card work?

secured credit cards

In order to give the card issuer some sort of protection against non-payment, a cash deposit is made in advance. The lowest amount you can deposit is usually $200-300, and the credit limit you receive often equals the amount you have deposited in the first place.

Plain and simple – if you put down $200 as a security deposit, you will typically receive $200 as your credit limit.

This doesn’t mean you’re spending the deposit, though! The money available to you is provided by the card issuer and renews each month after you’ve paid your bill. As long as you repay the whole balance on time and in full, you can get your deposit back after you close the account.

Let’s have a look at the pros and cons of secured credit cards.

Pros of Secured Credit Cards

Wondering what the benefits of secured credit cards are? No need to rack your brain any longer; here they are!

Easy to Get Approved

Secured credit cards are mainly targeted at people who:

  • Have no credit history
  • Have accumulated a bad credit score

This is because it’s easy to get approved for a secured credit card. As long as you put down a deposit, you’re good to go!

Build Your Credit Score from Scratch and Boost a Bad Credit Score

If you belong to one of the 2 categories mentioned above, it’s a great idea to get a secured credit card to build credit.

This type of card is specifically designed to raise your credit rating. Your credit issuer will regularly report your payment history to one of the three major credit bureaus (Equifax, Experian, or TransUnion), and you can expect to see an improvement in a matter of months.

As soon as your credit score has improved, you can apply for an unsecured credit card; or better yet, upgrade your account to an unsecured one. This is a great option offered by some issuers that can potentially give your credit score a boost since you don’t have to close any accounts (and therefore lower your length of payment history, an important factor of the credit score).

Low-Maintenance

Since your credit limit tends to be the same as your cash deposit, secured credit cards don’t usually offer astronomically high credit.

In order to build your credit score, you need to keep your credit utilization rate (how much credit you’ve used as compared to how much you have available) below 30%. Ideally, you should aim for a rate lower than 10%.

This means you should only make a few small purchases each month, which makes a secured credit card extremely low-maintenance. As long as you use it to buy a few items and repay before the due date, your credit will improve!

Cons of Secured Credit Cards

Alas, there are drawbacks to everything. These are two cons of secured credit cards.

You Won’t Be Able to Spend as Much

Yes, the credit limit can be quite low. Yes, this means the card is easier to manage if you’re only looking to build your credit score.

If you want to make bigger purchases on your card, however, a secured credit card might not be the best way to go. In order to keep the utilization rate low, you can’t spend much. For big shopping trips, a different card might do a better job.

Higher Interest Rates and Extra Fees

Unfortunately, secured credit cards often come with extra fees, such as an annual fee, application fee, or processing fee. The interest rates also tend to be higher because of the higher risk that comes with lending money to those who don’t have a good credit rating.

There are cards that offer some amazing deals, however. For example, the Capital One Platinum Secured Credit Card promises no annual and no hidden fees.

Unsecured Credit Cards: What You Need to Know

Most credit issuers require you to have a good or excellent credit score in order to be approved for an unsecured credit card.

unsecured credit cards

When you apply, an inquiry is placed on your account (meaning the issuer has requested to see your credit records), which automatically lowers your credit rating by a few points. Another part of the application process involves agreeing upon the credit limit, interest rates, and billing dates.

Before you know it, you’re free to use your credit!

To help you decide, here are the pros and cons of unsecured credit cards.

Pros of Unsecured Credit Cards

Let’s look at the most important benefits of an unsecured credit card, shall we?

Maximize Credit Card Rewards

Many unsecured credit cards come with amazing reward options, such as cashback, points, and travel miles. Who wouldn’t want to make the most of it?

The best way to maximize credit card rewards is to use a tool such as Lever; all you have to do is plug in the Chrome extension and let it do all the work for you. Lever will automatically choose which of your credit cards is best for each specific purchase.

Enjoy a Higher Credit Limit

Having a higher credit limit means two things:

  • You get to spend more on your purchases
  • It’s easier to keep your credit utilization rate low even when you shop more often

Despite the ability to spend more at once, though, you should always be sure to repay all your debt before the due date. Otherwise, you could easily harm your credit score.

Lower Interest Rates and Fewer Fees

Since you’ve worked hard to build a great credit score and get yourself an unsecured credit card, you can now enjoy the fruits of your labor in the form of lower interest rates and very few extra fees.

Recently, the average credit card interest rate has been reported to be 17.92%.

Cons of Unsecured Credit Cards

Unsecured credit cards have their downsides, too. Here are two of them.

Harder to Get Approved

In order to build a good credit score, you need to watch out for:

  • Payment history
  • Length of credit history
  • New credit
  • Credit utilization rate
  • Types of credit

Your credit score is calculated based on these factors, and it can take anywhere from six months to a few years to qualify as excellent. Since you need a great score to get approved for an unsecured credit card, it can be hard to obtain one.

We have some good news, though; you can actually get yourself an unsecured credit card for bad credit. For example, you can go for the Platinum Visa for Rebuilding Credit with Credit One Bank.

It’s Easy to Spend Beyond Your Means

When you’re spending what feels like imaginary money, it’s much easier to go wild. The consequences can be severe, though.

When you’re not able to repay all your debt on time because you’ve spent too much, your credit score worsens and you can face many high fees. You may also have to deal with a debt collector.

What’s more, maxing out your credit card makes your credit utilization rate skyrocket, which in turn harms your credit rating even more.

Secured Vs Unsecured Credit Card: Which One to Choose

While everyone’s financial situation is different, there are some simple rules to stick to when deciding between a secured and an unsecured credit card.

In general, you should opt for a secured credit card if:

  • You have no credit history (young adults, students, people with no previous credit cards)
  • You have a bad credit history (you didn’t keep a stellar credit score in the past and now want to start over)

An unsecured credit card is a perfect option for people who:

  • Already have a long and established good credit history (adults, the elderly)
  • Have a good to excellent credit score (young adults, adults, the elderly)

A secured credit card is usually the perfect stepping stone to getting an unsecured one.

Frequently Asked Questions

Can I get declined for a secured credit card?

Yes, you can get declined for a secured credit card if your credit reports are deemed too risky by the lender.

For instance, going through bankruptcy or having accounts sent to collections might not meet the card issuer’s minimum requirements.

Do unsecured credit cards build credit?

Yes, unsecured credit cards build credit just like secured ones do. As long as you pay in full before the due date, keep your card utilization low, don’t apply for too much new credit at once, and manage all your cards responsibly, your credit score should improve.

How much will an unsecured credit card raise my score?

It depends on how you use your unsecured credit card. If you keep your utilization rate low, build a stellar payment history, and manage all your other credit types well, you can reach an excellent credit score.

It usually takes about six months to build a good credit score if you’re starting from scratch.

Final Words

No matter which card you choose, always aim to build a good credit score. This will help you qualify for better mortgage interest rates, business loans, auto loans, and other financial benefits in the future.

The most effective ways of building a credit score with your credit cards are to:

  • Never max out your credit cards
  • Spend below 10-30% of your overall credit limit
  • Set up automatic payments to always pay on time
  • Double-check that the card issuer you’re choosing reports to one of the three major credit bureaus
  • Do not apply for more credit cards than you can handle
  • Maximize rewards

Oh, and remember – if you want to get the most out of your credit card rewards, try out Lever.

Not only will you use your credit cards to their full potential, but you’ll also be able to shop online without stressing about different rewards card types and bonus categories. 

The calculating is done for you – all you have to do is shop!

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