Secured Credit Card vs Unsecured

It’s easy to confuse the different types of credit cards, so let’s start by explaining the difference between a secured credit card vs unsecured credit card.

With a secured credit card you put down a cash deposit. Think of it like a security deposit on an apartment. The amount of the deposit is usually the same as your spending limit, but some banks set your limit at 1.5 times the deposit.

The spending limit can range from $200 up to $5,000.

Secured credit cards are starter cards. It’s a good card when you have poor or fair credit. Or when you have no credit and want to build a credit history.

Remember, don’t charge more than your spending limit and send at least the minimum payment on-time each month. Otherwise, your credit score won’t improve.

Then, use your new and improved credit score to get a better deal for yourself. An unsecured credit card with no deposit, a higher spending limit and lower interest rate.

We prefer a good secured credit card over a card designed for people with bad credit.

Yes, there’s that pesky deposit, but check out the fine print on both cards. You get much better terms with a secured credit card.

Here’s How a Secured Card Works

Let’s say you put down a $500 cash deposit when you open the account.

You get a $500 spending limit. And it’s a Visa or Mastercard, so it works just like any other credit card.

Again, don’t go over your credit limit and pay the full balance every month.

The deposit reduces the bank’s risk, so they approve almost every secured card application. And they return your deposit when you close the account.

If you start with a low spending limit, like $200 or $500, you can make multiple payments during the month when you need to spend more than the limit.

Why Is a Secured Card Better than a Debit Card?

A secured card is a credit card, so the bank reports it to the credit bureaus every month.

This means you’re building a good credit history that will get you approved for a regular credit card with no deposit.

A debit card, on the other hand, just takes cash directly from a savings or checking account. The banks don’t report debit cards to the credit bureaus, so this card won’t improve your credit score.

Who Should Get a Secured Credit Card?

This is a good card for someone who’s trying to build up their credit score.

Someone with no credit history. Or someone with a poor credit history who’s trying to get back on their feet.

And remember that banks approve almost every application. The deposit takes away their risk, so there’s little chance of being declined.

Can You Convert to an Unsecured Card?

Yes. And that’s exactly what you want to do over time as your credit score increases.

There are two ways to convert your card.

First, apply with a company that let’s you upgrade to an unsecured account after a year. Or second, use your secured card wisely for a year. And then leverage your new and improved credit score to get a regular Visa or Mastercard.

Whichever route you choose, remember to stay under the credit limit and send at least the minimum payment on-time each month.

What’s the Downside? 

There’s only one real downside to a secured card. You won’t have access to your cash while it’s tied up in the security deposit.

Capital One® Is Our Favorite

Secured Mastercard® from Capital One® has many strong benefits.

It’s a Visa or Mastercard with no annual fee.

The initial credit line is only $200, but you can request an increase every 6 months.

Capital One is known for their outstanding customer service.

And, thanks to the security deposit, they approve almost every application. When it comes to banks and credit the deposit may be your best friend.

There are two approval exceptions. First, Capital One will decline an account when the applicant has been turned down for another card in the past 3 months. And second, when the applicant has defaulted on two or more loans at any time in the past.

One thing we don’t like about this card is the high interest rate, which is currently 26.99%.

However, you can avoid all interest charges when you pay off the balance each month.

Summary

It’s good to know the difference between a secured credit card vs unsecured, so you can evaluate which credit card works best for you.

A secured card requires a “security deposit” when you open the account. The amount of the deposit will be your spending limit, which can range from $200 up to $5,000.

This is a good card when you’re building up your credit, because your payment history gets reported to the credit bureaus. Payment history is 30% of your credit score, so a secured card will improve your credit score quickly.

Remember that debit card activity never gets reported to credit bureaus. So, a debit card won’t increase your credit score.