The world of credit can be an incredibly confusing place. If you don’t know much about credit, how it works, and the different types of credit that are available to you, it is very easy to make poor decisions that could have a long term effect on your credit report.
So, it is best to do lots of research before you go down any route of credit.
If you are considering getting a credit card, then you might find yourself torn between purchasing a credit card or a secured credit card. Although, you might not actually know what the difference is between the two.
In this guide, we’ll be taking a look at credit cards and secured credit cards to find out what the difference is between the two. So if you want to find out more, keep on reading!
Credit Cards Vs Secured Credit Cards: At A Glance
If you are simply looking for a quick overview of credit cards vs secured credit cards, here you go:
- Credit cards are the name most commonly associated with unsecured credit cards. Unsecured credit cards can be obtained without the need for a security deposit, and they typically have higher credit limits and lower interest rates/fees.
- Secured credit cards can only be obtained by putting down collateral, and they are often used by those with bad credit who cannot get unsecured credit cards. They typically have higher fees and higher interest rates.
|Credit Cards||Secured Credit Cards|
|Interest and Fees||Generally tend to have lower interest rates and fewer fees.||Interest rates tend to be higher, and there tends to be more fees attached to these cards.|
|Accessibility||Best suited for those with good credit scores/reports.||Easier to access for those who have poor credit histories.|
|Cost||“Premium” credit cards aside, generally there isn’t any cost associated with these cards.||Secured credit cards require a down-payment that acts as collateral (usually a couple of hundred dollars).|
|Improve Your Credit Score||When used responsibly (with all payments made on time), credit cards can improve your credit score.||Responsible usage of a secured credit card can help build your credit score.|
|Perks||Perks include lower interest rates and fewer fees.||Perks often include things such as cashback and discount for certain retailers.|
The Even Parts Of The Playing Field
There are lots of similarities between secured and unsecured credit cards, here are just a handful of the ways in which these credit cards are similar to one another.
You Are Spending Borrowed Money
Both secured and unsecured credit cards allow you to use money that you do not actually have to purchase things. Both of these credit cards work by borrowing money from an extended line of credit, and then repaying the money through monthly repayments on a bulk re-payment depending on your preference.
Both Add Interest
Both unsecured and secured credit cards add interest onto the money that you have borrowed when you make repayments. You will be expected to repay this interest on top of the money that you are already re-paying.
Both Can Help Build Your Credit Score
While a secured credit card is the safer option out of the two, both secured and unsecured credit cards can help build your credit score. As long as you are using the credit card correctly, and making repayments on time, then you can build your credit score using both cards.
What Are Credit Cards?
First things first, let’s take a look at what credit cards are. Technically speaking, secured credit cards are a type of credit card. So it is very important to note that when we speak about credit cards in this guide, we will be referring to unsecured credit cards.
The terms “unsecured credit card” and credit card are often used interchangeably. This is because unsecured credit cards are usually what people are talking about when they use the term “credit card”. These types of credit cards are credit cards that act as a line of credit without requiring a security deposit.
Unsecured credit cards can often be a lot more appealing than secured credit cards as they come with lower interest rates, fewer fees, and do not require an upfront payment for you to use them.
However, due to these things, unsecured credit cards often end up being the more dangerous of the two as it can seem like you have very little riding on the line of credit.
- More Perks – Unsecured credit cards often come with lower interest rates, fewer fees and they do not require an upfront payment in order for you to access them.
- Higher Credit Limits – These allow you to spend more money, and can also help improve your credit utilization rate on your credit report.
- Rewards – Many credit card providers include rewards for those who use unsecured credit cards, such as cash back in certain stores and discounts.
- No Collateral – As you are not putting down any collateral for these credit cards, it is very easy to fall into bad spending habits.
- Bad Credit – If you are somebody who has a bad credit history, then you may struggle to get an unsecured credit card as all the lender has is your word that you will pay it back. If you have bad credit, then your past actions do not reflect your word.
What Are Secured Credit Cards?
As we have said, the term “credit card” is typically used to refer to unsecured credit cards. For many people, unsecured credit cards are the norm, and this is why many people haven’t actually heard of secured credit cards. So what are they?
Well, secured credit cards are fairly similar to unsecured credit cards. Just like unsecured credit cards, they extend a line of credit to you that you can utilize and pay back monthly with interest added.
However, secured credit cards ask for more than just your word that you will pay the money back, they ask for collateral too.
Typically, when you take out a secured credit card, you will be expected to make a cash deposit. This cash deposit allows you to use the credit card, as the cash deposit can be retained if you fail to make repayments for the money you have borrowed.
While the thought of paying a down payment can be off-putting, it is actually a really good thing. If you are looking to improve your credit score and build your credit report, then a secured credit card is definitely the better choice in comparison to an unsecured credit card.
- Helps Build Credit – Secured credit cards can be used to help build your credit score without having to worry about damaging your score in the process.
- Get Approved Easier – If you have a bad credit history, you are much more likely to be accepted for a secured credit card due to the collateral down payment you make.
- Refundable Deposit – As long as you do not break the terms of your credit agreement, you will have the down payment refunded.
- Earn Rewards – Just like unsecured credit cards, a lot of secured credit cards come with a range of rewards, such as cashback and discounts.
- Large Down Payment – Typically, secured credit cards will require a hefty down payment, and this isn’t always something that everyone can afford.
- Higher Interest Rates – In comparison to unsecured credit cards, the interest rates associated with secured credit cards do tend to be much higher.
Credit Cards Vs Secured Credit Cards: The Differences
Now that we have taken a look at both regular credit cards and secured credit cards individually, let’s compare the two to find their differences.
Due to the fact that you are required to pay a down payment for a secured credit card, these credit cards are more secure for the lender.
The amount of interest that you pay on a secured credit card will typically be higher, you will also be expected to pay more in annual fees than when using an unsecured credit card.
If you are looking to improve your credit score, then a secured credit card is a much safer option. This type of credit card allows you to build your credit score in confidence. Whereas unsecured credit cards could end up doing more harm than good.
If you do not have much of a credit history, or have a poor credit history, then a secured credit card is likely to be much more accessible to you due to the down-payment involved in it.
Credit Cards Vs Secured Credit Cards: The Bottom Line
Now that we have compared secured and unsecured credit cards, let’s take a look at which one is the best.
While the lower interest rate and lack of down payment associated with an unsecured credit card can be tempting, we would always say that a secured credit card is the better option. Especially if you want to protect your credit history.
It can be far too easy to fall into poor financial decisions when using an unsecured credit card. There is no collateral associated with it, and this can lead you to spend beyond your means which can then lead to you missing repayments. This will then damage your credit history.
While secured credit cards are a little stricter, they can really help you build a healthy relationship with credit, and help improve your credit score at the same time. They really are a win-win situation.
Frequently Asked Questions
Is it Better to Get a Secured or Unsecured Credit Card?
Generally speaking, unsecured credit cards tend to offer better deals to customers, including perks such as rewards, lower fees and lower interest rates. However, secured credit cards will be the better option for those with poor credit scores.
Will A Secured Credit Card Raise My Credit Score?
One of the best ways to build your credit score if you have no credit experience, or have a poor credit score, is to use a secured credit card. Secured credit cards carry less risk than unsecured credit cards, allowing you to build your credit score through your transactions.
Is a Secured Card Worth It?
If you have a poor credit score, then a secured credit card is definitely worth it. Secured credit cards can help you build your credit score until it reaches a healthy point. So they are definitely worth the money.
In short, credit cards (also known as unsecured credit cards) and secured credit cards have similarities and differences. Ultimately, we would say that secured credit cards are the better option. But, we have discussed the two heavily in this guide.
So if you want to make up your own mind, check out the guide above!
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.