man holding credit card

Secured vs Unsecured Credit Card: What’s The Difference?

Filife team

    Under lockdown restrictions, most people have been required to purchase goods virtually. Online trading has been the best option since cashless payments are encouraged. While uncertainties continue, credit cards have become our daily convenience.  

    If you have been planning to apply for one but do not have enough knowledge, upon research, you may have encountered secured credit cards and thought of its difference from the regular ones.

    As advised, if you have no or bad credit, a secured credit card can help in building a positive credit history. Although secured cards share many similarities with unsecured credit cards, the major difference between the two is that when a card is unsecured, you don’t have to put money down as collateral.

    Penny Saved will delve into its comparison thoroughly to help you whichever fits your situation.

    Secured Credit Cards

    Noting that secured credit cards can help in your credit history, it requires you to make a minimum or security deposit to get a credit limit. 

    The security deposit acts as a guarantee if you default on payments, but is fully refundable should you upgrade to an unsecured card or pay off your balance in full and close your account. 

    That secured card deposit is held by the bank to cover purchases made with it, in case you stop making payments on the account. Normally, if you open a secured card, the amount you deposit will be the amount of the card’s credit limit, depending on minimum deposit requirements and how much extra you add on top.

    Secured credit cards are also easier to obtain because there are fewer qualifications that are needed to be approved.  The information you’ll only need to supply is your full name, birth date, address, Social Security number, employment information, and income.  If an application is not approved, the cash deposit will be returned to you nonetheless.

    Unsecured Credit Cards

    Unlike secured credit cards, the regular ones offer fewer fees. It also provides a better deal for customers with more perks including excellent travel benefits, reward programs, and lower interest rates. And while secured cards are supported by major card networks like Visa and Mastercard, there are more cards to choose from for the unsecured credit cards.

    There are also higher credit limits given to its cardholders, which are helpful enough to fund large purchases without maxing out the card or hurting the utilization ratio.
    However, the terms of the debt are based upon the borrower’s credit rating, ability to pay, as well as the application information and other factors. Thus, while the debt is unsecured, this type of debt is typically slightly riskier for lenders to issue.

    It can also be noted that although unsecured credit cards are the most common form of credit cards, not everyone can qualify for this type of card. Having a limited credit history or poor credit may require you to get a secured credit card.

    What are the Drawbacks?

    Like many other things, there are key areas you have to weigh to decide on which plan to apply for. Cardholders should always be responsible for their cards and applicants should read the terms and conditions carefully before opening an account.

    Listed below are the drawbacks for the two:

    Secured Cards Drawbacks

    • Large deposit requirements. Although the money is refundable, any one-time deposit of a few hundred dollars is already a large payment that could easily throw off a fixed budget.
    • Extra fees. Inevitably, besides the required deposit, secured cardholders may encounter excessive fees such as monthly maintenance charges, application processing fees, and other annual payments.
    • Low credit limits. As secured card deposits normally become a card’s credit limit, if you cannot put down a couple of thousand dollars, you won’t have a large credit limit. This means it will be essential to keep track of your spending to make your debt available to credit ratio doesn’t increase higher. 
    • Fewer to no rewards. Despite the good in the word secured, the manner of using credit wisely is encouraged because while secured cards cost you money, it’s highly likely you also won’t get anything in return outside of your credit history.
    • Not all issuing banks report accounts to the credit bureaus. Both types of cards report your movements to the three credit bureaus Experian, Equifax, and TransUnion. 

      It suggests purchases, balances, and credit card payments will be reported to each, which they turn around and use to build a history of credit usage under your name. Note that this isn’t a given with secured cards, you’ll have to check to make sure before applying.

    Unsecured Cards Drawbacks

    • Credit score requirements or approval qualifications differ.  Depending on the card you are getting,  score conditions will vary. Even if you have been a qualified cardholder, you may still not be guaranteed of the best rewards card. 

      This is one of the many reasons why you need to research when finding a card to fully understand whether it fits your demands, budget, and your score.

    Comparing Secured and Unsecured Credit Cards

    Requires deposit.Doesn’t require a deposit.
    Qualify with bad or no credit.Qualify with good FICO score and credit history.
    Higher interest rates.Lower interest rates.
    Fewer rewards.Lots of rewards.
    Has extra charges.Fewer fees.
    Almost always tagged as ‘secured.’Not labeled ‘unsecured.’
    Has a low credit limit.The credit limit is based on its creditworthiness.
    Usually charges annual payments.Often charges annual payments.
    Do not require credit checks.A credit check is mandated.

    When Should You Get a Secured Card?

    With hopes the figure we’ve shared above helped in your decision-making, we’ll discuss further the qualifications you must have to apply for a secured card.

    If you’ve never had a credit card before, have had a bad credit score, or recently filed for bankruptcy, a secured card is the best option for you. However, because secured ones need a deposit and payment of extra fees, it’s best you make sure you can support the additional costs before applying.

    To build or rebuild your credit, assuring you are a responsible and reliable cardholder is necessary. Thus, getting a secured card can also be possible if you can afford to pay your card balance off in full, promptly every month.
    Always remember the amount you need to pay and your payment records are the two largest factors impacting your FICO credit score.

    Like regular credit cards, you can apply for secured cards online. You’ll have to provide many of the same application details, nonetheless. If anything, prepare to disclose bank account and routing numbers to fund your collateral and other applicable fees.

    We also recommend finding a secured credit card that reports to all the three credit bureaus, if you think secured ones fit your needs the most.

    How to Upgrade an Unsecured Card?

    If you have had a credit card for bad credit and were able to boost your credit score as a result, you may think of when you can avail of an unsecured credit card. 

    Apparently, after several months of great secured card use, you may be automatically upgraded. But if not, there are two options to choose from.

    When your credit score reaches the mid-600s, you can immediately contact your secured card issuer. You can ask them to transfer your secured line of credit to an unsecured card, or simply apply for a new unsecured card and close the secured credit card account you have. 

    Once you close an old secured credit card account in good standing, you will get your full deposit back.

    Usually, it’s urged to just apply for a new unsecured credit card once your credit score is at an acceptable range. This option allows you to pick the right credit card for your demands, whether you want to earn your money back or qualify for a 0 percent APR and consolidate debt.

    Which Credit Card Should I Get?

    Narrow down the differences between the two and from that, you can easily determine which are the ones that would be beneficial to you. It’s certain, however, that it all boils down to one thing. Your decision may need to depend on your credit standing.

    Although you will undergo the same process with a secured credit card as you would with an unsecured credit card when it comes to building your credit score, grasp with the plan that caters exactly what you ought to receive.

    We recommended that if you are in need of borrowing money for an emergency, getting an unsecured credit card would be the best option. However, if you are aiming to enhance your credit records, a secured credit card settles it. 

    Remember that with a good credit score, a consumer can make significant savings on bigger deals, access to more of the best credit cards, plus insurance discounts, housing options, and security deposit waivers on utilities.

    This is why upon getting your card, use it in the proper way to get the most for your money. Meet the requirements to get your ideals. If you plan to establish credit, pay your bill in full on time. It’s better to also tick to your debt payoff plan if you snagged a 0% APR deal. 

    Above all, Penny Saved is here to assist you in your personal finance – may it be deciding to get a credit card to choose whichever type to apply for.