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

Getting approved for a credit card can feel challenging, especially if your credit score falls in the fair or poor range (669 or lower), or if you’re just starting out and don’t yet have a credit history. The good news is, there’s a credit-building option designed specifically for situations like these: secured credit cards.

Secured credit cards offer a way for individuals with limited, fair, or damaged credit to start building a solid credit profile. By making on-time payments and using the card responsibly, you can gradually show lenders that you’re creditworthy.

However, it’s important to know the differences between secured vs unsecured credit cards before applying. Every solution has its own collection of guidelines, prerequisites, and advantages and fulfills a distinct financial function. Checking the major differences between secured vs. unsecured credit cards can help you choose the right card for your financial goals.

An unsecured credit card is the standard type of credit card most people are familiar with. Unlike secured cards, unsecured credit cards don’t require a cash deposit upfront. Instead, approval is generally based on your credit score, income, and overall financial profile. Your credit limit and interest rate are typically influenced by how strong your credit history is.

Unsecured credit cards operate as a revolving line of credit, giving you access to a set credit limit that you can spend from repeatedly. As long as your balance stays below the limit, you can make purchases throughout each billing cycle.

At the end of the billing cycle, usually every month, you’ll receive a statement detailing your charges, current balance, minimum payment due, and the payment deadline. You usually have about three weeks to pay your bill before interest kicks in.

Paying off your full balance by the due date helps you avoid interest charges. But if you only make a partial payment, the remaining balance carries over to the next cycle, and interest may apply to both the unpaid amount and future purchases.

A secured credit card is a type of credit card that requires a refundable security deposit when you open the account. This deposit typically acts as your credit limit. Secured cards are commonly used by individuals looking to build or rebuild their credit, especially if they have a limited history or a low credit score.

The main difference between secured vs. unsecured credit cards is the required security deposit. With a secured card, your deposit typically sets your starting credit limit. Most issuers require a minimum deposit, often around $200, but you may have the option to deposit more for a higher limit.

Some issuers may increase your credit limit over time if you demonstrate responsible use, such as making on-time payments and keeping your balance low. The deposit protects the issuer in case you default, which makes it easier to qualify for a secured credit card.

It’s important to note that your deposit isn’t used for monthly payments. You still need to pay your bill on time to avoid fees and negative marks on your credit report.

Related: Personal Loan vs Credit Card

As the required security deposit is the primary difference between secured vs. unsecured credit cards, there are several other distinctions to consider.

Secured credit cards are generally designed for those working to build or repair credit. They often come with fewer perks, higher interest rates, and additional fees, like monthly maintenance charges or application fees, not commonly found with unsecured options.

On the other hand, unsecured credit cards typically cater to consumers with stronger credit profiles and often include valuable perks such as cash back rewards, travel benefits, or statement credits. Some even offer premium features like airport lounge access and loyalty program upgrades. Cards like the Synchrony Premier World Mastercard® provide everyday cash back with no annual fee.

However, not all cards fit neatly into these categories. Some unsecured cards aimed at low-credit applicants may include high fees and minimal benefits. Meanwhile, a growing number of secured cards now offer competitive rewards and low or no annual fees.

A few innovative secured credit cards even allow flexible deposits linked to your bank account, letting you adjust your deposit over time, giving users more control as they build credit.

Related: How Does Credit Card Fraud Happen?

Even if you use a secured or unsecured credit card, both can influence your credit scores in similar ways. What truly matters is how you manage the account, not the type of card you have. Responsible use of either card can lead to positive changes in your credit profile over time.

Here are some main ways credit cards can affect your credit scores:

• Payment history: Making payments on time helps strengthen your credit. However, missing a payment by 30 days or more can significantly lower your score.
• Credit mix: If you don’t currently have a credit card or revolving credit account, opening one can diversify your credit profile and potentially boost your score.
• Credit age: Credit scoring models consider the age of your accounts. While opening a new card might lower your average account age initially, maintaining the account long-term could benefit your scores.
• Credit utilization: This is the ratio of your credit card balance to your credit limit. Keeping this ratio low, especially below 30%, is good for your credit. You can do this by using less of your available limit or making payments throughout the billing cycle.

Ultimately, payment history and credit utilization are the most influential factors in your credit score. Whether it’s a secured or unsecured credit card, using it responsibly can contribute positively to your credit over time.

Approval is not assured even though secured credit cards are normally easier to qualify for than unsecured ones. Your financial history, including your income, recent credit history, and general creditworthiness, is still examined by lenders. Even if you are ready to offer the security deposit, you may be rejected if you do not meet the issuer’s specified conditions, such as minimum income or banking history.

The process of applying for a secured credit card is similar to applying for an unsecured one. Start by comparing different secured card options to find one that fits your needs, check the eligibility criteria, and then begin your application.

During the application, you’ll typically be asked to provide personal details such as your name, date of birth, address, Social Security number, income, and employment status. Most secured cards also require you to submit your security deposit upfront, usually through a debit card or linked bank account.

You may be prepared to switch to an unsecured credit card if you have used your secured credit card sensibly and your credit score has increased. Depending on your preferences and the card issuer, there are a few ways to switch.

One option is to request an upgrade directly from your issuer. If you’ve demonstrated responsible use, such as on-time payments and low balances, they may be willing to convert your secured card to an unsecured version. Some issuers even upgrade customers automatically after 12 to 18 months of positive activity.

Another route is to apply for a new unsecured credit card entirely. Once approved, you can choose to close your secured card account. If the account is in good standing, your security deposit will be fully refunded. However, closing a long-standing account could affect the length of your credit history, which plays a role in your credit score.

Instead of terminating your account, think about requesting a conversion from your issuer. This keeps your credit history intact while assisting you in receiving your money back. When you’re prepared, investigate the best unsecured credit cards that provide benefits that align with your financial objectives, such as travel points, cash back, or other advantages.

Managing your credit card wisely is key to avoiding unnecessary fees and interest while making the most of its benefits. Whether you have a secured or unsecured credit card, these simple habits can help you maintain financial control and protect your credit score.

• Pay your balance in full each month – To avoid interest charges, try to pay off your credit card statement in full. Carrying a balance doesn’t help your credit and may lead to unnecessary interest.
• Use your card like a debit card – A good rule of thumb is to only charge what you can afford to pay off right away. This helps prevent debt buildup and ensures you stay within your budget.
• Skip cash advances when possible – Withdrawing cash from your credit card often comes with high fees and interest that starts immediately. It’s best to use your debit card or bank account for cash needs.
• Don’t overspend for rewards – Credit cards with rewards programs can be appealing, but avoid making extra purchases just to earn points or cash back. Overspending can wipe out any value those rewards offer.

When used responsibly, credit cards can offer convenience, security, and even rewards. But because both secured and unsecured cards tend to carry high interest rates, keeping balances low or paid off entirely is essential for long-term financial health.

There’s no one-size-fits-all credit card. The best option depends on your financial situation, spending habits, and goals. Taking time to compare features and match them to your needs can help you choose the right card.

A secured credit card can be the best course of action if you’re just getting started or have a short credit history. To help you establish credit, look for a card with low fees and, if at all feasible, one that provides incentives or other helpful features.

You might also look at other credit cards that are intended to help you establish credit. You can establish credit without a security deposit or exorbitant fees with certain unsecured cards that evaluate your bank account activity rather than credit scores.

As your credit improves, you’ll qualify for a wider selection of unsecured credit cards. Compare options based on rewards programs, annual fees, interest rates, and cardholder perks. Travel cards, cash-back cards, and balance transfer cards all serve different purposes.

Premium cards may offer valuable benefits, but high annual fees only make sense if you maximize the rewards and use the features regularly. If simplicity is more your style, a no-annual-fee cash-back card, like the Synchrony Premier World Mastercard®, can provide solid everyday value without added costs.

Deciding between a secured vs. unsecured credit card largely comes down to your current credit standing. If you’re just starting to build credit or trying to recover from past credit challenges, a secured credit card can be a smart first step. Be sure to compare top secured card options, focusing on those with low fees and added benefits that align with your financial goals.