You might be wondering what types of credit cards are available if you have a low or nonexistent credit score. When you have a low credit score, finding a lender who will approve you for a standard, unsecured credit card is tough. Enter: A secured credit card as a potential solution.
Secured credit cards work much like regular credit cards and provide a way to access and build credit. They usually require a security deposit as collateral to open, but then you can use them like a standard credit card to build up a positive payment history and improve your credit score over time.
Read on to learn the difference between secured and unsecured credit cards, the pros and cons of each, and which is right for you in terms of building credit.
What is a secured credit card and how does it work?
A secured credit card requires a security deposit, which serves as collateral for the account. If you default on your payments, your lender can keep your deposit.
For those who cannot get approved for a standard unsecured credit card, which typically requires a credit score of at least 580 or higher, secured credit cards are a way to build a history of on-time payments to establish or improve your credit score.¹ Once you open one, it can be used like a regular credit card for purchases.
Here are some key features of a secured credit card:
- Requires a security deposit: Secured credit cards require a security deposit to open. The minimum deposit depends on the credit issuer, but it’s possible to find a secured credit card with no minimum security deposit requirement (like Chime’s).²
- Builds credit history: Since secured credit cards are intended to help you build credit, credit activity is reported to credit bureaus (like Equifax®, Experian®, and TransUnion®).
- Limited credit limit: The credit limit on a secured credit card is typically the same amount as the security deposit you paid to open the card. You may have a lower credit limit if you put down a lower security deposit.
- May have annual fees: Some secured credit cards may come with annual fees, application fees, or other fees, so be sure to read the fine print and compare your options so you know about any costs upfront.
- May offer rewards: Some secured credit cards offer rewards programs, like cash back or points, but many do not.
- Can be upgraded to an unsecured credit card: Depending on where you open your secured card, some issuers may automatically review your account after a certain period to see if you’re qualified to upgrade.
Secured credit cards are an excellent way to establish or improve your credit score. When used responsibly over time, you can build your credit score up enough to qualify for an unsecured credit card and other types of credit and loans down the line (like an auto loan or a mortgage loan).
Still, there are some pros and cons to be aware of:
| Pros | Cons |
|---|---|
| High chances of approval for those with poor or no credit | Security deposit required upfront |
| Allow you to build credit | Limited credit limit |
| Security deposit may be refundable | Approval not guaranteed |
Examples of secured credit cards
- Chime Credit Builder Secured Visa® Credit Card³: The secured credit card from Chime has no annual fees, no interest,⁴ no minimum security deposit,² and does not require a credit check to apply.
- Capital One® Platinum Secured Credit Card: This secured credit card from Capital One has no annual fees and allows for a refundable, flexible deposit.
- Discover it® Secured Credit Card: This secured credit card from Discover has no annual fees and does not require a credit score to apply.
What is an unsecured credit card and how does it work?
An unsecured credit card is a traditional credit card. You don’t need a security deposit to open one – instead, lenders review your credit history when you apply to determine whether you’re a reliable borrower. If approved, you’ll be issued a credit limit and can use your card anywhere credit cards are accepted.
To pay your credit card, review your monthly billing statement, the minimum payment due, and your payment due date. You’re responsible for paying at least the minimum payment due each month, but you can avoid interest charges by fully paying off your balance each month.
Unsecured credit cards come with different terms and rates, which your credit score largely influences. Those with higher credit scores can usually be approved for more favorable terms and lower interest rates, which can save money in the long run.
Here are some common features of unsecured credit cards:
- No security deposit required: Unsecured credit cards don’t require an upfront security deposit.
- Interest rates: Unsecured credit cards have an interest rate (APR). If you carry a balance on your card month to month, interest is charged on top of your outstanding balance.
- Credit limit: When you open an unsecured credit card, you’re assigned a credit limit, the maximum amount you can borrow on the card.
- May have annual fees: There are many different types of credit cards available to choose from, and some may have annual fees.
- Rewards programs: Many unsecured credit cards offer rewards programs, like earning points, cashback, or other rewards.
Here’s an overview of the pros and cons of unsecured credit cards:
| Pros | Cons |
|---|---|
| No security deposit required | Interest charges and fees can accumulate quickly |
| Allow you to build credit history | Excessive spending can lead to debt |
| Many rewards programs and perks available | Irresponsible use can damage your credit score |
Secured credit cards vs. unsecured credit cards: key differences
Secured and unsecured credit cards have more in common than you may think. The main difference is that you have to pay a security deposit to open a secured credit card.
As for similarities, you can use secured and unsecured credit cards to make purchases online, in stores, or wherever credit cards are accepted. Though they both charge interest if you don’t make your monthly payments on time, unsecured credit cards tend to offer lower interest rates.
Here are some of the main differences between secured and unsecured credit cards:
| Secured credit card | Unsecured credit card | |
|---|---|---|
| Approval process | Requires security deposit | Based on your credit score and history |
| Annual fees | Typically none | Sometimes |
| Average APR | 20%+³ | 26%³ |
| Minimum credit score needed | Typically available for scores 580 and lower4 | Typically 670+4 |
| Rewards available | Yes | Yes, but less common |
Build credit faster with a secured credit card
Both secured and unsecured credit cards can put you on the path to building a positive credit history. But if you lack credit history or can’t qualify for an unsecured credit card because of a low credit score, a secured credit card can help you establish credit or rebuild a damaged score.
Whichever credit card you choose, be sure to practice smart credit habits and use your card responsibly. With time and effort, you can demonstrate that you’re a dependable borrower and eventually upgrade to an unsecured credit card.
FAQs about secured credit cards vs. unsecured credit cards
Still have questions about secured vs. unsecured credit cards? Find answers below.
Can I improve my credit score with an unsecured credit card?
Yes. Practicing sound credit habits like making on-time payments each month and keeping your balances low can help improve your credit score over time.
Will unsecured credit cards hurt my credit?
Whether an unsecured credit card hurts or helps your credit depends on how responsibly you use it. You can improve your credit if you maintain a history of on-time payments and keep your balances low. However, consistent late payments or high balances can negatively impact your credit score.
Can I upgrade from a secured to an unsecured credit card?
It depends on your credit issuer, but you can often upgrade from a secured to an unsecured credit card after demonstrating a history of on-time payments for a predetermined period.
How long before a secured card becomes unsecured?
The timeframe for upgrading from a secured credit card to an unsecured credit card varies widely depending on your credit issuer and your credit activity over time. Many credit issuers may review your account periodically, such as every six to twelve months, to assess your progress and determine your eligibility to upgrade.
What are the downsides of getting a secured credit card?
Secured credit cards may have higher fees and interest rates than unsecured credit cards, and they require a security deposit upfront to open (typically starting at around $200, depending on your credit issuer). However, if you need to improve a bad credit score, these short-term downsides will ultimately pay off once you build your credit with a secured card.
How is a secured card different from a prepaid card?
Secured credit cards require a security deposit and function as a credit card, allowing you to borrow against a credit limit and make payments. Prepaid cards require you to load funds onto the card in advance, and you can only spend the available balance. Secured cards help build credit, while prepaid cards don’t impact credit history.
Are student credit cards secured credit cards or unsecured credit cards?
In most cases, student credit cards are unsecured credit cards, but they may need proof of college enrollment to apply. Similar to secured credit cards, however, student credit cards may have lower credit limits. Student credit cards also often have more lenient requirements regarding credit scores and income compared to other traditional, unsecured credit cards.