Secured Credit Card vs. Unsecured Credit Card: Which Is Right for You?

Secured and unsecured credit cards have some things in common, but there’s one key difference between them. Let’s look at the main differences between secured vs. unsecured cards, and how each one works.

What is a secured credit card?

A secured credit card is a credit card that’s tied to collateral, which is a technical way to describe something of value, like a house or a cash deposit.¹

You’re probably familiar with collateral but just don’t know it. For example, if you have a car loan, your car is what secures the loan. If you’ve got a mortgage, your house is the collateral.

With secured credit cards, the collateral is usually a cash deposit. So, how does a secured credit card work?

It depends on the card issuer, but it usually goes something like this:

• You apply for a secured credit card and make a cash deposit with the credit card company.
• Once approved, you can use your card to make purchases, up to your credit limit.
• You can pay your balance in full each month, or just pay the minimum due.
• The credit card company reports your account details to the credit bureaus, helping you build your credit score.¹

Your cash deposit may act as your credit limit. For example, if the credit card company requires a $200 deposit, then you may have a $200 credit line. Secured cards typically have low credit limits but it’s possible to find cards that allow larger deposits.

A secured credit card has an annual percentage rate (APR), which is your cost to borrow. The APR kicks in when you charge something to your card and pay it off over time. The main thing to know about APR is that it’s a way to compare credit cards. For example, a secured card with a 27% APR will cost you more than a card with a 22% APR.

Your card may charge an annual fee, or other fees, like late fees. Some secured cards let you earn rewards on purchases. For example, you may earn a percentage of what you spend back in cash.¹

What is an unsecured credit card?

An unsecured credit card is a credit card that doesn’t require any collateral. You don’t need to put up any cash to open this type of account. Here are a few other things to know about unsecured cards:

• Some cards have annual fees, others don’t.
• Unsecured cards can potentially offer higher credit limits than secured cards.
• Rewards, benefits, and features may be more generous with an unsecured card.²

There’s also a difference in credit score requirements to qualify for a secured vs. unsecured credit card.

Secured cards are typically designed for people with thin credit, no credit, or poor credit. The typical person who opens a new secured credit card has a subprime credit score, meaning it’s in the 300 to 580 range, according to the Consumer Finance Institute.²^,³

A secured card can help you build credit so you can eventually qualify for an unsecured card. Unsecured cards span the full credit score range, with some cards aimed at people with fair credit and others targeted toward people with excellent credit.

Whether you have a secured or unsecured credit card, building credit works the same way. First, let’s briefly look at what goes into your credit history.

FICO^® credit scores, which are the scores 90% of top lenders use for credit decisions, are calculated based on five factors:

• Payment history (35%)
• Credit utilization (30%)
• Credit age (15%)
• Credit mix (10%)
• Credit inquiries (10%)⁴

The lowest FICO score you can have is 300 and the highest is 850. How you build credit with a secured credit card (or an unsecured card) is to use it in ways that have a positive impact on the factors listed above.

How to improve your credit score

These strategies can help if you’re new to credit-building or trying to improve your score.

• Pay your bill on time or early each month and never miss a due date.
• Keep your utilization, or the percentage of your credit limit that you use, as low as possible.
• Actively use your card, even if it’s just to make one small purchase each month that you pay in full.
• Limit how often you apply for new credit.⁵

Good credit can take time to build, but if you consistently practice these habits with your card, you’ll eventually start to see your hard work pay off.

If you have a secured credit card now but want to switch to an unsecured credit card, there are generally two ways to do it. You could:

• Spend a few months building a positive account history with your current card issuer and request an upgrade.
• Build positive credit history with your current card, then apply for a new unsecured card.⁶

The first route may be the fastest if your card issuer periodically reviews accounts to see if you’re eligible for an upgrade. For example, you may be able to switch to an unsecured card after six months of on-time payments. If that happens, your credit card company may refund your deposit.

If your secured card issuer doesn’t offer that option, you can look at unsecured cards from other companies. Look for a card that:

• Is designed for people with your credit profile (i.e., fair credit, good credit, etc.)
• Offers the features or benefits you would find most valuable or useful
• Has a reasonable APR and minimal fees

It’s better to take your time when choosing an unsecured card, versus applying for multiple cards to see what you get approved for. Each time you apply for credit it can add a new inquiry to your credit reports. Inquiries knock a few points off your score, which is what you don’t want when you’re trying to build good credit.⁷

When is it better to choose a secured or unsecured credit card? Your answer will depend on where you’re starting from, credit-wise, and your goals for opening a new credit card account.

Here’s how to compare secured vs. unsecured credit cards at a glance.

If you want to build credit with on-time payments but don’t qualify for an unsecured credit card or want to avoid the potential to go into debt, consider a secured credit card from Chime.

The main difference between a secured and unsecured credit card is collateral. You need a deposit for most secured cards but you won’t need one for an unsecured card. Either card could help you build credit, but a secured card may be easier to qualify for.

If you’re ready to open a new credit card account, it helps to know what options you have. Learn which credit cards are the best for building credit from scratch.