Secured vs. Unsecured Credit Cards: How Do They Work?

When you're comparing new credit cards, you might find there are secured and unsecured cards. You can use either type of card to build a credit score, finance purchases and benefit from cardholder protections, such as zero liability on unauthorized purchases. And there may even be rewards cards available within both categories. But there are several important differences and eligibility requirements between the two types of credit cards. If you're debating whether to get a secured vs. unsecured credit card, this article is for you.

What Is an Unsecured Credit Card?

An unsecured credit card is what most people think of when discussing credit cards. With unsecured cards, your creditworthiness can determine your eligibility for a credit card and the interest rate you receive. Your account's credit limit can also depend on your credit score, income and the type of unsecured card.¹

How do unsecured credit cards work?

Unsecured credit cards are revolving credit lines, which means your account has a maximum credit limit that you continually borrow against. You can use your credit card to make purchases throughout a billing cycle, as long as your balance is below your credit limit.

At the end of the billing cycle, around one month later, the card issuer sends you a statement with the billing cycle's transactions, your current balance, the minimum required payment and your bill's due date. Generally, you have around three weeks to pay the bill.² The next billing cycle starts right away, and you can continue using your card during this time.

If you always pay your bill in full, you won't be charged interest on your purchases. However, if you pay less, you can revolve part of your balance to your next billing cycle. When you do, the card issuer can charge you interest on the revolved amount and may start charging you interest on new purchases immediately.

What Is a Secured Credit Card?

A secured credit card requires you to send the card issuers a refundable security deposit when you open your account. Many people use them to establish their credit history or to rebuild their credit rating if they have a low credit score.

How do secured credit cards work?

The main difference between unsecured and secured credit cards is the security deposit.

Your security deposit generally determines your account's initial credit limit, and there's often a minimum deposit requirement, such as $200. But you may be able to send more money if you want a higher credit limit. And some credit card issuers monitor your account and increase your credit limit if you use your card responsibly.

The credit card company can use the security deposit to cover unpaid balances if you stop making payments, which limits the company's risk. As a result, it's easier to qualify for secured credit cards.

However, the credit card company won't use the security deposit for your minimum payments. If you miss those, you could still wind up with late payment fees, and the late payment could hurt your credit scores.³

Comparing Secured vs. Unsecured Credit Cards

Although the security deposit distinguishes secured and unsecured cards, there are also some common differences between these types of credit cards.

For example, secured cards tend to be for people who have trouble qualifying for unsecured cards—they're more of a stepping stone than the goal. Many secured cards also have high fees, high interest rates and low (or no) rewards.

A few secured cards even charge fees you don't commonly find on unsecured cards, such as one-time fees when you first apply, monthly fees to keep your account open and credit limit increase fees.

In contrast, unsecured cards may offer higher rewards rates and more cardholder benefits, such as access to airport lounges, status in loyalty programs and statement credits for everyday purchases. The Synchrony Premier World Mastercard®, for example, offers cash back on everyday purchases without an annual fee.

But there are also options that defy the traditional norms. For example, there are unsecured cards for people with low credit scores that charge high and unusual fees without offering many benefits. And some of the best secured credit cards offer rewards and don't have annual fees.

A few of the newer secured credit cards even change up the security deposit requirement by connecting your card to a bank account and giving you the flexibility to increase or decrease your security deposit as you go.¹

Secured vs. unsecured credit cards: Pros and cons

	Pros	Cons
Secured credit cards	• Easy to qualify for if you don't have good credit. • Can help you establish or build credit.	• Requires an upfront deposit. • A low credit limit can limit the card's usefulness. • May have high interest rates and unusual fees. • Might not offer many cardholder benefits.
Unsecured credit cards	• A security deposit isn't required. • Many options to choose from, including different types of rewards cards. • Can help you establish or build credit.	• May require good credit to qualify. • No guaranteed credit limit. • Could have a high interest rate.

How Can Credit Cards Impact Your Credit Scores?

Secured and unsecured credit cards can have the same impact on your credit scores. What matters is how you use the card and your overall credit profile—not whether the card is secured.

Some of the ways credit cards could affect your credit include:

• • Payment history: Your on-time credit card payments can help your credit score, but missing a payment by 30 or more days can hurt it.
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• • Credit mix: If you don't already have a credit card or line of credit, opening a new credit card could add to your credit mix and improve your scores.
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• • Credit age: The age of your oldest account, newest account and average age of your credit accounts are all scoring factors. Opening a new account can hurt your scores a little at first, but could benefit you in the long run.
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• • Credit utilization: Your credit card's balance and credit limit are reported to the credit bureaus around the end of each billing cycle. Using a smaller portion of your credit limit is best for your credit scores. You may be able to do this by limiting how often you use your credit card, having a high credit limit or paying down your balance during your billing cycle.

Although there are many ways credit cards could hurt or help your credit, the most important factors tend to be your payment history and credit utilization. If you can make your payments on time and maintain a low utilization ratio, a secured or unsecured credit card will likely help your credit scores over time.

Tips for Responsibly Using Credit Cards

It's important to learn how to manage credit cards to get the most benefits and avoid fees and interest charges.

• • Try to pay your bill in full every month. You can avoid interest charges on purchases if you pay your bill in full. You also won't hurt your credit scores by paying in full. Revolving a balance doesn't help your credit.
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• • Treat your credit card like a debit card. One way to make sure you can always afford the full payment is to only make purchases when you have enough money to cover the expense.
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• • Avoid cash advances. Although many credit cards let you withdraw cash from an ATM or bank, there's generally a fee for cash advances and the amount starts to accrue interest immediately.
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• • Don't spend money to earn rewards. Many credit cards offer cash back or other rewards. It can be tempting to justify a purchase because you're earning rewards, but that can lead to overspending.

When you use them responsibly, credit cards can be a safe and rewarding alternative to other payment methods. But unsecured and secured cards both tend to have a high interest rate, and carrying a balance can wind up costing you a lot of money if you're not careful.

How to Choose the Best Credit Card

There's no single best card, or type of card, for everyone. But you can consider your situation, preferences and how you plan to use the card when comparing your options.

If you're new to credit or have a low credit score, you may have to start out with a secured card. Ideally, you can find a card that doesn't charge many fees and offers rewards or other benefits.

Also, look into alternative cards that are designed to help people build credit. Some unsecured cards use your bank account data, rather than a credit score, to qualify you—allowing you to build credit without handing over a security deposit or paying high fees.

Once you've established good credit, you can compare the many unsecured credit cards. Compare credit card rewards rates, cardholder benefits, fees and other features before deciding which to apply for.

Some premium cards offer lots of benefits but charge hundreds of dollars in annual fees. They might be worthwhile, but only if you put a lot of time into understanding the rewards program and optimizing every purchase and rewards redemption.

A good alternative is a card with a high cash-back rate and no annual fee, such as the Synchrony Premier World Mastercard®, which offers cash back on every purchase.

 

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance and small business finance, and loves helping people find ways to save money. He also writes for Experian, FICO, USA Today and various fintechs.

 

READ MORE: How to Find the Perfect First Credit Card Based on Your Needs

 

Sources/references

1. The Consumer Credit Card Market. Consumer Financial Protection Bureau. Published September 29, 2021.

2. What is a grace period for a credit card? Consumer Financial Protection Bureau. Reviewed August 26, 2020.

3. Axelton, K. How Secured Credit Card Deposits Work. Experian. Published January 25, 2020.