Secured and unsecured credit cards: what are the differences?

Differences Between Secured and Unsecured Credit Cards

If you’re trying to build credit in the United States, you’ve probably come across different types of credit cards, such as secured and unsecured. But what’s the difference between them? How do they work? And, most importantly, which one is best for you? Don’t worry! Here, we’ll talk in a simple and straightforward way about everything you need to know.

First of all, it’s worth remembering that credit cards are much more than just a form of payment: they can be a powerful tool for building credit history and, over time, opening doors to better financial opportunities. So, let’s understand the differences between these two types of cards?

What is a secured credit card?

Secured credit cards are those that require a security deposit in order to be approved. Here’s how it works: when you apply for this type of card, you’re required to make a cash deposit, which usually corresponds to the credit limit you’ll have. For example: if you make a deposit of $200, your limit will be $200.

This deposit acts as collateral for the card issuer. If you fail to pay your bill, the bank can use this money to cover the debt. This is why secured cards are a great option for those with bad credit or no credit history. Plus, they usually have a much higher approval rate than traditional cards.

How can a secured card help?

Whether you’re starting out from scratch or recovering from bad credit, secured cards can be the key to building a positive history. Just use the card responsibly: pay your bills on time and keep your balance low relative to the limit (ideally less than 30%). Over time, the card issuer will report your good behavior to credit bureaus like Equifax, Experian, and TransUnion.

On the plus side, in some cases, after a few months of good use, you may qualify for an unsecured card or even get your deposit back.

NerdWallet is a great resource for comparing secured cards and finding the one that best fits your needs.

What are unsecured credit cards?

Unsecured credit cards are those that do not require a security deposit. They are more common and are usually offered to people who already have a good credit history.

With this type of card, the credit limit is determined based on factors such as your credit score, income, and payment history. Because issuers are taking on a greater risk by lending money without collateral, these cards usually have stricter approval requirements.

What are the differences between the two types?

Secured cards require a security deposit, which usually sets the credit limit, making them easier to approve, especially for beginners or people with bad credit. These cards are considered low risk by the bank, and are ideal for those looking to build or rebuild their credit history.

Unsecured cards, on the other hand, do not require a security deposit and have a credit limit determined based on the user’s income and financial history. Since they are intended for people with a good credit history, their approval tends to be more difficult, presenting a greater risk to the bank in case of default.

Which type of card is best for you?

The answer depends on your current financial situation. If you are starting from scratch or trying to rebuild your credit, a secured card may be the best option. Even though it requires an initial deposit, it is an excellent first step to accessing better cards in the future.

Now, if you already have a positive credit history, you can go straight for an unsecured card. They usually have better benefits, such as rewards programs, cashback and lower interest rates.

Conclusion

Understanding the differences between secured and unsecured cards is the first step to making smarter financial decisions. If you are starting from scratch, a secured card is like a “gateway” to the world of credit. If your credit is already up to date, unsecured cards may offer more interesting benefits.

Oh, and if you need help comparing cards, check out specialized websites to find the best options.

There you go! Now you have all the information you need to choose the right card for you. Let’s go! Your financial future will thank you!

Written by

Juliana Raquel