Secured Credit Cards vs. Unsecured Credit Cards: Which It Better

Secured Credit Cards vs. Unsecured Credit Cards

To make an informed decision about which kind of credit card is best for your company, you must first familiarize yourself with the distinctions between secured and unsecured credit cards.

Most small company owners with decent credit already have access to credit cards. What can a low-credit entrepreneur do? Get a secured credit card? Learn about unsecured and secured credit cards.

How do Secured Credit Cards work?

Secured credit cards are under the category of credit cards that need a cash deposit as security. Typically, this deposit equals or slightly exceeds the size of the credit line you are granted. For instance, you could be eligible for a $500 line of credit if you apply for a secured credit card and put down a $500 deposit as collateral.

It may be tough to comprehend why people with bad credit would be prepared to apply for a credit card that needs an upfront cash deposit, but there are a few good reasons. When your credit score is low, being accepted for a typical, unsecured credit card might be challenging. However, if you can’t find a lender to grant you credit, you might not be able to build up your credit over time.

On the other hand, consumers who need to improve their credit ratings may secure their line of credit with a cash deposit using a secured credit card. Additionally, since their payments are recorded to the three credit bureaus, consumers have the chance to develop credit over time and raise their credit scores.

Comparing secured and unsecured credit cards

On a very fundamental level, the main distinction between these two sorts of cards is that a secured credit card needs a deposit of some kind to serve as collateral, while an unsecured credit card does not. A secured card may be used as a tool for those with poor credit to improve their credit ratings. In contrast, unsecured cards often provide more considerable credit limits and cheaper interest rates.

Unsecured credit cards are a better option for customers. Unsecured credit cards do not need a deposit or collateral to be put down. The majority of credit cards are secured. Credit cards without a security deposit can provide more significant benefits and incentives.

Applying for a secured card

The procedure for applying for a secured credit card is the same as that for an unsecured credit card: you must first compare secured credit cards to determine which one has the features you want, then submit your application.

Your name, birth date, address, Social Security number, job details, and income must be included on the secured credit card application. When applying for a secured credit card, you will often be required to submit a security deposit. You may typically finance this amount online using a debit card or a bank account. The cash deposit you made will be refunded to you in most cases within a few business days if your application for a secured credit card is denied.

How to improve an unsecured card

You could be considering switching to an unsecured credit card if you’ve used a secured card for a while and have seen an increase in your credit score. There usually are two ways to cancel your secured credit card account: you apply for a new credit card and close your secured credit card account, or you ask your card issuer to convert your secured line of credit to an unsecured card. Remember that if you terminate an old secured credit card account still in good standing, you will get a full refund of your deposit.

When your credit score is in a good range, it’s typically simpler to merely apply for a new unsecured credit card. If you want to consolidate your debt, get a credit card with a 0% APR, or both, you may pick the best card for your requirements using this option.

A secured card vs. an unsecured card for credit building

Both secured and unsecured credit cards may increase your credit score similarly.

The Experian, Equifax, and TransUnion credit bureaus get information about your transactions from both kinds of cards. To create a history of credit utilization in your name, the bureaus gather information about your transactions, balances, and credit card payments.

You should aim to pay your bills early or on time each month and keep your credit usage rate under 30% if you want to establish credit and maintain a high credit score.

Unsecured credit cards are the most frequent kind.

There is a significant likelihood that your current credit card is unsecured if you currently have one. Since the card functions similarly to an unsecured bank loan and does not call for a deposit or other form of security, the phrase “unsecured” may seem problematic to you as a customer. Still, it more correctly depicts the risk the card issuer has assumed.

Unsecured credit card terms depend on your credit history since you can’t offer collateral. If you have a good credit score, you’ll have a higher chance of getting a bigger credit limit, lower interest rates, and additional incentives like cash back and miles. If you have bad credit and apply for a credit card, you’ll receive one with a smaller credit limit, higher interest rates, and little perks. Equifax, TransUnion, and Experian define “excellent” scores differently, but 700 to 800 is a reasonable starting point.

Banks and credit card companies minimize their risk by using the power to negatively impact your credit report if you often skip payments or overcharge your account instead of asking for collateral to safeguard your investment.

Your total credit score is often reduced when overdue accounts are reported to credit agencies. Other creditors will see this as a severe problem, which will stay on your record for years as a reason why you should not be approved for new credit or loans.

Other options for credit card companies and overdue accounts include going after your money through collections, requesting wage garnishments to make up for their losses, or bringing legal action against you.

Creditors’ safest alternative is secured credit cards.

While secured credit cards come with certain built-in guarantees at the borrower’s cost, unsecured credit cards may pose a risk to card issuers. A secure credit card, as opposed to an unsecured one, calls for a cash deposit from the cardholder, which serves as security for the credit card provider.

The deposit is the card’s possible credit limit and often ranges from $200 to $300. A more significant deposit will result in a higher credit limit. This deposit is a one-time expense for the borrower, who will get reimbursement after demonstrating their capacity to keep the account in good standing or when it is terminated.

Due to the collateral behind these cards, banks and credit card issuers are more likely to accept applications from all customers, including those with bad credit or no credit. As a result, these cards are typically regarded as a slow and safe way to establish credit.

What advantages and disadvantages do secure and unsecured credit cards have?

In addition to the need for collateral, both unsecured and secured credit cards have advantages and disadvantages that come with them by default. If you rigorously make your payments on time for both cards, you may be able to improve your credit score, while the converse is also true. Aside from proving your creditworthiness in one way or another, both cards provide access to money you did not previously have.

The two credit card kinds also have certain similarities in terms of advantages and disadvantages. Both card kinds, for example, may involve collections agencies if your account is not paid in full by the 120-day deadline, but even in that case, both card types will have had a negative influence on your credit score. In addition, applying for a credit card, whether secured or unsecured, may result in a “hard pull” on your credit report, which might lower your credit score. Secured cards, which demand collateral, make this problem slightly less likely.

Unsecured credit cards often have lower interest rates, although they may still be costly. As was already noted, average rates may reach as high as 20%. You probably aren’t putting much of a dent in your principal if you’re just paying the minimum payment required by a high APR. Furthermore, if you don’t pay off your card in full each month, a high APR will cause you to pay more than the original price of whatever it was you bought with the card.

The advantages of an unsecured card

Since unsecured cards are the most popular credit card, you’re probably already aware of many of their benefits. The benefits of care utilizing an unsecured credit card include the following:

APR is less. You probably have a respectable credit score if you have an unsecured credit card. Banks and credit card companies will feel more relaxed, giving you a reduced interest rate. A lower interest rate encourages you to keep using the card since smaller monthly payments entail fewer overall costs. You may expand your credit limit at a reduced rate.

You have Expanded credit limits. Again, you’ll probably be trusted with a more considerable borrowing amount since you probably have a respectable credit score. You can immediately access larger-ticket purchases with a higher credit limit without worrying about approaching the limit.

Your overall credit usage ratio—which compares the amount of credit available to the customer with the total debt they have racked up—is also impacted by having a higher credit limit. Credit agencies use utilization ratios as a gauge of your credit-use discipline. Lenders can assume you’re an expensive and possibly hazardous borrower if you utilize more credit than average.

More card options. Your possibilities are pretty diverse since this is the most popular kind of credit card. Many organizations issue credit cards, from large and small banks to independent businesses, so you may find an unsecured card that meets your demands.

The benefits of utilizing credit cards. Since they benefit financially from interest and extra credit card fees, credit card issuers urge borrowers to use their cards. Offering unique benefits to their consumers is one way they often accomplish this. If you consider this a key selling factor, search for cards that, among other benefits, give cash back, discounts at specific merchants when using the card, or travel miles that can be exchanged for flights.

Increased reporting to credit bureaus. Although it only makes up a small portion of your total credit score, credit card use is one of the most extensively considered factors. Because card issuers are at risk from your unsecured credit cards, they inform credit bureaus regularly on the health of your credit card use. You may learn more about your performance and find out how to raise your score with this detailed inflow of data. But since late and lost payments are also regularly reported, this may sometimes become a double-edged sword.

Unsecured Credit Card Drawbacks

Having or seeking to get an unsecured card has significant drawbacks, despite its numerous advantages. Listed below are a few negatives:

Each card has a different set of criteria. It’s becoming harder and harder to locate two credit cards with identical acceptance criteria since unsecured cards are so prevalent. The minimum credit score criteria differ depending on the card issuer. Thus one card may call for a credit score of 580 while another may demand a score of 700. This type of variation implies you’ll need to complete your study on your credit score and the required score to qualify for the card you desire.

Added costs. Your agreement can include extra charges depending on the kind of credit card you use. The most typical price for an unsecured credit card is an annual “convenience” fee, which may be between $20 and $200. Selecting a card without a yearly fee may eliminate this problem, as many cards are available that don’t. If you fulfill the criteria for additional costs, you should be prepared to pay late payment fees, balance transfer fees, and cash advance fees.

A Secured Card’s Advantages

A secured card offers several distinct advantages while requiring you to deposit money as security. The following are a few benefits:

Returnable deposit. Your deposit is returned to you as long as you continually pay off your account’s amount and do so. This might assist as a target to remember as you use and pay off the card over time.

They are Establishing credit. With expensive interest rates and meager credit limits, getting a respectable unsecured credit card will be challenging if you have terrible credit. To assist those with poor credit in digging themselves out of the hole they have created for themselves, credit card issuers are more likely to accept applications from those who need some kind of collateral. The protected card may sometimes be upgraded to an unsecured card. Remember that a saved card records payment history, which causes a slower ascent.

Disadvantages of a Secured Card

Before applying for a secured credit card, keep in mind some of the drawbacks listed below:

A deposit is necessary. As was indicated before, you need to deposit up to $300 in cash to apply for a secured credit card. Increasing your deposit may be necessary if you want a bigger credit limit.

You Decreased credit limits. The security deposit you put down often serves as the only credit limit for secured cards. You will thus have a significantly tighter credit usage ratio than you would with an unsecured card.

Extra charges. Secured credit cards, like unsecured credit cards, sometimes have various additional costs, such as monthly maintenance fees, yearly upkeep fees, or incidentals. These might increase the card’s final price and are not refundable.

Absence of credit bureau reporting. Not all companies that provide secured credit cards submit information about them to the three bureaus. You must ensure the card issuer reports the account’s activity if you depend on such a card to aid in your credit development since failure to do so would render your efforts ineffective.

Which one should you pick?

Consider your current credit score situation while choosing which card to apply for. While an unsecured card may be excellent if all you want to do is keep or improve your already respectable credit score, a secured card may be able to assist you in recovering from a poor or nonexistent score.

According to Broughton, “both secured and unsecured credit cards have their benefits, but the necessity for either relies mostly on your credit score and financial objectives.” A secured card is the most excellent choice for developing credit with a card if you have difficulties being approved for an unsecured card.

While the majority of individuals will prefer to get an unsecured card, you should typically only think about getting a secured card if you have no credit history or a credit score that is too low for an unsecured card.

Frequently Asked Questions

How quickly can a secured credit card improve credit?

Depending on your credit history, the response to this inquiry will vary. It takes longer to alter an extensive credit history than a small one. In approximately a month, if the secured card is your only source of credit, your score will start to rise. If the history is lengthy, it may take many months or even years to see a change. In the second situation, paying off unpaid debt will hasten the improvement of your credit score.

What distinguishes a protected card from a prepaid debit card?

Prepaid debit cards and secured cards may have a similar sound but are fundamentally different. A prepaid debit card allows you to load funds onto the card or account before using them to make purchases. You truly are paying in advance.

A secured credit card’s first payment is more akin to a security deposit than an advance payment. However, the secured credit card is still a credit card. The card issuer keeps that money in case you cannot pay off the card. You’ll be required to reimburse the card’s issuer for any changes you make. Your deposit is returned to you when you finally shut the account or modify it.

The concept of carried balance provides an alternative perspective. It makes no difference how long you have a balance on a prepaid debit card since you already own that money. On a secured credit card, carrying debt is hazardous since interest will be added to that amount.

How can one make the switch to an unsecured credit card?

Each card issuer has different guidelines and restrictions related to this procedure. Continuing with the same card issuer is often simpler to “graduate” to an unsecured card. Other issuers usually follow an exact strategy, and Discover offers a lesson outlining their procedure.

You may become eligible for an unsecured card after using the secured card for a sufficient amount of time to show a pattern of responsible usage. Your credit score and credit history will still play a role in determining the credit limit, annual fees, and APR for that card, but it is still possible to “graduate” when your credit score is below the typical “good” level. Typically, the application procedure is all that is required to graduate.

What credit score is required to get approved for a credit card?

No standard credit score is needed for all cards; card issuers may establish their own requirements. They often don’t provide cards to anyone with “poor” credit. Scores may fluctuate, but those between 550 and 650 are often regarded as poor and can reject applications for numerous cards.

Some credit cards are designed expressly for those with “poor” credit. Regardless of the cardholder’s credit score, these cards may be issued with higher interest rates, lower credit limits, or other restrictions. A prime example is the Surge Mastercard.

Content Editor and Writer at Payday Champion | + posts

Aubrey Saffa Bender has been a freelance journalist and journalist since 2013. She writes about topics that range from personal finances and education to technology and business. In her work for PaydayChampion, Aubrey primarily draws from her writing experiences regarding mortgages, home purchases, and real estate. She graduated with a B.A. with a major in English at The University of Colorado Boulder.

Author: Aubrey Saffa Bender

Aubrey Saffa Bender has been a freelance journalist and journalist since 2013. She writes about topics that range from personal finances and education to technology and business. In her work for PaydayChampion, Aubrey primarily draws from her writing experiences regarding mortgages, home purchases, and real estate. She graduated with a B.A. with a major in English at The University of Colorado Boulder.

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