Secured Credit Cards vs. Unsecured: What’s the Difference?

Here’s a catch-22: you need a credit card to boost your credit, but you can’t boost your credit without a credit card. Secured credit cards can help people with poor credit escape this paradox. But what’s the difference between a secured credit card and an unsecured card anyway?

 Unsecured credit cards 

Most credit cards are unsecured, which means they don’t require a deposit as collateral in case cardholders can’t pay off their debt. Rewards, retail and low-interest cards are typically unsecured, and they offer benefits such as cash back, travel perks, store discounts and interest-free introductory periods. Since they’re less likely to pay off their debt, it’s difficult for people with bad credit to qualify for secured cards. There are a few unsecured credit cards that are easy to qualify for, but they have high annual fees, which are deducted from the credit limit. Rather than opening a high-fee card, we suggest applying for a secured one.

Secured credit cards 

Secured credit cards are designed for people with bad credit or no credit. Since these customers are considered a bigger risk for card issuers, they’re required to make a deposit. The deposit amount varies, but it’s typically equal to the credit card’s credit limit. For example, if the credit limit were $500, the deposit would also be $500. Once the initial deposit is paid, secured cards work just like unsecured ones. They’re accepted wherever credit cards are, including online, and you incur interest if you don’t pay your balance off in time. You can get secured credit cards from the same issuers and networks as unsecured cards. Like unsecured cards, some secured cards come with annual fees, but we suggest you stick to cards with yearly fees less than $50.

 Final word 

Although they require a deposit, secured credit cards are better than no credit card at all. If you get one, your goal should be to improve your credit score until you’re eligible for an unsecured card. Some issuers will let you transfer your secured line of credit to an unsecured one when you qualify. If you minimize your credit card spending and pay off your balance in full and on time, you’ll eventually become eligible for an unsecured card and escape the bad credit trap.