Secured Credit Cards vs. Unsecured Credit Cards

If you’re trying to build credit, you might have had at least one person suggest getting a credit card, using it for a few things each month, and paying off the statement in full. That’s good advice, but if your credit isn’t quite where you want it to be, you might be worried about qualifying for a card in the first place.

The good news is, thanks to secured credit cards, you might qualify for a credit card even with bad credit. But how do you choose between a secured credit card vs. unsecured credit card?

What is the difference between secured and unsecured credit cards?

With standard, unsecured credit cards, you don’t have to pay a deposit. Once you’re approved and given a credit line, you can make purchases and pay them off over time.

If you don’t have good credit, many credit card issuers see you as too risky to lend to. Instead, they may approve you for a secured credit card. 

With a secured card, you make a deposit before you start using your card. That way, if you fail to make payments, the lender can just recoup their money by taking it from your deposit.

Notably, both unsecured and secured credit cards help you build credit equally well. That’s because all card issuers report your payments to credit bureaus.

How secured credit cards work

Getting a secured credit card usually involves more steps than needed for an unsecured card. Here’s how it typically works:

• You find a lender and apply
• If you’re approved, you make a refundable deposit
• That deposit becomes your credit line
• You make purchases and pay them off
• If you default, the lender takes money from your deposit

If you close your account in good standing, you get your deposit back. Many lenders will also offer an upgrade to an unsecured card after a period of time. If your secured card is upgraded, you’ll get your deposit back then, too.

How unsecured credit cards work

When you get an unsecured card, you don’t make a deposit. Once your card arrives, you can start using it and making monthly payments as agreed.

There’s no collateral, but that doesn’t mean there aren’t consequences if you default. Missing payments still damages your credit score, and your lender may file a lawsuit or sell the debt to a collection agency if you refuse to pay.

Unsecured credit cards often have lower interest rates, lower annual fees, and better cash back/rewards programs than secured credit cards do.

Secured credit card vs. unsecured credit card: how to choose

Now you understand the difference between secured and unsecured credit cards. But how do you choose? The right option depends on your situation.

If you're building credit from scratch

If you’re building credit from scratch, you can likely still qualify for unsecured cards. You’re most likely to get approved for “student” credit cards, which have lower credit limits (and usually fewer rewards). You might also find luck with cards specifically designed for fair credit.

Look for card issuers who offer pre-approval. That means a lender will do a “soft” credit check to see if you qualify first. A soft credit check won’t have an impact on your credit score.

If you're rebuilding after damaged credit

If your credit has been damaged and you’re trying to rebuild, you may or may not qualify for unsecured cards. If your FICO score is in the “fair” range (580-669), there’s a reasonable chance that you’ll qualify for some unsecured cards, but it’s still wise to look for secured options when you can.

If your credit is below 580, a secured credit card is probably going to be the better option. Interest rates and fees may be higher, but remember that this is temporary. As long as you keep your account in good standing, you should be able to level up to an unsecured card with better terms in the future.

If you already have decent credit

If you have decent credit already, an unsecured card is almost certainly the better choice. And the better your credit gets, the better your chances of qualifying for perks like:

• Cash back
• Flexible rewards points
• Travel miles
• Sign-up bonuses
• 0% introductory APRs
• Travel insurance
• Airport lounge access
• Purchase protection
• Hotel discounts

If you qualify for a high-end credit card and strategically use its reward programs, you might end up saving more money than you’d anticipated.

Conclusion

If you’re looking to build (or rebuild) credit, deciding between a secured credit card vs. unsecured credit card is important. But that’s just one of many decisions you’ll need to make along the way.

Getting your credit from point A to point B can be overwhelming, but it helps to have a knowledgeable guide along the way. Kikoff is a credit builder app especially for people with poor credit, a limited credit history, or no credit. 

We offer secured credit cards and other tools to help you take your credit to the next level, and we also give you personalized insights to help you reach your financial goals. 

It’s free to join, and we don’t check your credit. Get started with us today!