Secured Credit Card vs Unsecured: Which Option Is Best For You?
Contemplating a secured card? We break down secured credit card vs unsecured: advantages and disadvantages of each and situations when you might want to use them.
With over a billion credit cards in use in the US, credit cards have become an everyday fact of life for most of us.
While most credit cards are unsecured, meaning you don’t have to pledge any collateral (like cash) to use them, there is a small sub-segment of cards that are secured.
Secured credit cards are typically targeted for use by consumers with either no credit or poor credit. They are generally meant to be ‘credit builders,’ affording these consumers a small amount of credit in order to show they can make consistent payments and build their credit scores.
How it works is that the consumer makes an upfront deposit and then is in turn given the same amount back in credit. If they don’t make repay the purchase they make on the card, the credit card issuer can simply keep the deposit. Typical deposits/credit lines start in the $3-500 range, but they can be more.
This is substantially lower than ‘normal’ credit cards, which often have credit lines from $10-30K, depending on the credit issuers’ assessment of the consumer creditworthiness.
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Secured credit cards can be a good option if you need to build credit
Advantages of secured credit cards
Secured cards can be an option for people who want or need to build credit but don’t have any other financing options.
Often if you have low or no or even bad credit, you might not be able to get any kind of financing extended to you, especially unsecured financing.
Secured credit cards can be a small way to demonstrate to credit bureaus that you can handle credit and make repayments on time.
These cards are also often easier to manage since they tend to have such small credit limits on them. The small credit limits can also reduce the temptation to overspend since you really cannot buy very much with a few hundred dollars of credit extended.
Disadvantages of secured credit cards
The primary disadvantage is the small credit line. If you are able to obtain a ‘normal’ card and are responsible enough to manage it, then a secured card just may not be worth the extra hassle of managing another card for such a small amount of credit.
Additionally, most secured credit cards do not offer any kind of rewards program. There is a new trend where some secured cards will offer up to 1% cash back or travel points rewards.
However, if you have reasonably good credit it is fairly easy to get a card with at least 1.5-2.0% cash back (or travel points equivalent).
Furthermore, secured cards tend to have both higher fees and higher interest rates than non-secured credit cards.
Secured credit cards are also not accepted for every type of transaction. Hotels, for example, tend not to accept secured cards for reservations or incidentals.
Lastly, you may want to consider that since the credit line tends to be so low, if you use very much of it at all, you may have a high credit utilization ratio, especially if you do not have another financing in place (like other cards or loans).
If you have good credit and can responsibly manage a credit card, a normal card is probably a better option
Advantages of regular, unsecured credit cards
Regular cards offer higher credit lines, most are in the $10-30K range. If you have multiple cards with the same company, you may come up against a rule that your total combined credit line cannot exceed $50K, but for most people, this is more than enough to cover everyday expenses. If you need access to a greater amount of liquidity, you might want to consider a line of credit instead.
Higher credit limits can also make it easier to maintain a lower credit utilization, which in turn can have a positive impact on your credit score.
Additionally, regular cards offer rewards. Typically you can get about 1-2% of your purchases on the card back in either points or cash back.
Most regular credit cards are also widely accepted at most retailers and merchants.
Disadvantages of regular, unsecured credit cards
Potentially the largest potential downfall of a regular credit card is the potential for mismanagement. With a secured card, you’ve already put up the money, so to speak, with a security deposit, so the most you can lose is that money (plus interest and fees charges).
However, with unsecured cards, you could lose a lot more. If you lose track of your spending, then you might end up spending a lot more money than you can afford to repay. What’s worse, with the median APR for all types of credit cards being 25%, not only will you need to eventually repay the money you couldn’t afford, you might be paying a shockingly high-interest rate on that amount as well.
So, if you end up being irresponsible, the higher credit line might have you losing a lot more money than a secured credit card would let you lose.
The right card varies depending on your individual situation
While regular credit cards are attractive with their high credit lines and rewards programs if you cannot manage them properly, they are not a good choice for you. A better option might be a secured card or even a debit card in that case.
On the flip side, if you are able to manage debt and payments carefully, but don’t have a credit score yet, or have a bad one, a secured credit card can be a good option for you to use as a stepping stone to getting a regular card in the future.
While we discussed a lot of factors, the biggest one we would consider is what we mention above, you’re current credit situation and your responsibility and dedication to repay.
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Editor & Author
Cathy Gresham is a finance whiz.
After earning her MBA from The Wharton School, she has worked in strategy at some of the world’s largest and most influential financial companies for 20+ years. Notably, she has worked for the biggest credit card issuers and networks and brings an insider’s perspective to how credit card products work behind the scenes.
Cathy is passionate about personal finance and investing, and loves helping people learn about these complex topics. Her wit and humor make learning about money fun, and she’s always happy to share her knowledge with others.
Cathy enjoys spending time with her family and friends when she’s not crunching numbers or developing investment strategies. She’s also an avid runner, and can often be found pounding the pavement on her morning jog.