Fintech Security

Secured vs. Unsecured Credit Cards — What’s the Difference? | Deepak Juneja

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If you’ve ever been casually looking for a new credit card for personal or business use, you may have noticed that there is an ever-increasing abundance of options available. Not only does every longstanding bank have a credit card, but with the rise of fintech challengers, there are new credit cards, and even types of credit cards being added to the list of choices every day.

One type of credit card that you may have run across is a “secured” credit card. Let’s go over what it is, how it’s different from other credit cards, and how you can use it to build your credit.

What is a secured credit card?

A secured credit card is one that requires a security deposit (hence the name). Somewhat similar to a security deposit that you leave on a new apartment, it acts as a fallback payment for the lender in case you miss payments or fail to pay off your balance. If you were to default, the lender collects your deposit. Most, if not all, will refund your security deposit if you were to upgrade your card or close your account.

Beyond that, secured credit cards can vary widely in their terms and conditions. Some require you to pay off your balance in full every month, making them more of a hybrid between a secured credit card and a charge card (more on that later). Others allow you to carry a balance and charge interest, only holding the security deposit as a type of “guarantee.”

Creditors often offer secured credit cards as a way to give customers with little credit history, or poor credit, a way to build credit and establish a relationship with their institution. The security deposit eliminates the risk associated with extending credit to those with poor or no credit. Most creditors who have secured cards either feature automatic upgrades to “regular” (or unsecured) credit cards, or an option to upgrade after a period of time with regular, on-time payments.

What is an unsecured credit card?

An unsecured credit card does not require a security deposit or any other money down. They come with a credit limit that you don’t need to pay any money to establish. Most traditional credit cards that banks offer are unsecured (but may not be marked as such).

Like secured cards, unsecured credit cards come with a large variety of terms and conditions, as well as rewards programs. Most, if not all, allow you to carry a balance from month to month, so long as you make your minimum payment. Usually, unsecured cards come with higher credit limits than secured cards do.

Which card is better for building credit?

Both secured and unsecured credit cards can help you build credit. What matters more in the credit-building game is that the card reports activity to the major credit bureaus. As a reminder, for personal credit, these are Experian, Equifax, and TransUnion. For business credit, these are Experian, Equifax, and Dun & Bradstreet.

Generally speaking, secured credit cards are designed to help credit newcomers and those looking to rebuild their credit do just that. They’re usually much easier to obtain for those with poor credit scores.

Of course, once you have a credit card, you need to demonstrate responsible use. Be sure to always make your payments on time (or early), and to try and keep your credit utilization below 20%.

Bonus: other credit card types

Remember how we said there were a lot of different types of credit cards on the market? Well, in addition to secured and unsecured cards, there are a couple of others that are important to know. And of course, there are hybrids of these!

Charge cards

Charge cards require you to pay your balance in full at the end of the month. These types of cards aren’t particularly prevalent today, but there are still some on the market, such as the American Express® Gold Card. There are also a lot of hybrid cards that employ charge card principles, especially in the business credit card space. AtoB, for example, is a gas credit card that requires payment in full at the end of a 7-day billing period. Tillful Card is a secured business credit card that requires payment in full at the end of a 30-day billing period.

Corporate cards

Corporate cards are a broad category, but generally, they are charge cards connected to a business bank account. They also allow you to set employee spending limits. Two cards that fall under the broad “corporate card” category are Ramp and Brex.

Wrapping up secured vs. unsecured credit cards

With so many new cards and innovations hitting the market, many credit card types don’t neatly fit into set categories. However, there are broad sweeping definitions to keep in mind as you scroll past all the different names, roundups, and product sheets. Ultimately, when choosing a card, be sure to read the fine print (and ask a rep questions if you need to) to be sure that it fits your needs, and that you’re getting what you signed up for.

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