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If you have ever applied for a “regular” credit card, you are probably aware that many different types of cards are available.
Credit cards, both secured and unsecured, are examples of them. Before you choose between these two options, you should be aware of the fundamental differences between secured and unsecured credit cards.
The main distinction is the consumer's deposit with the bank: the better the perks, the more premium the card.
What Is A Secured Credit Card?
As the name suggests, a secured card is a card that is backed by something. Like with a secured loan, you must give the card issuer something as security to get the card. A secured credit card needs a cash deposit (or security deposit) to open the account.
You can use a secured credit card anyplace a typical unsecured credit card is accepted once you have deposited the required amount. If you have no credit history or poor credit, you should start with a secured credit card.
Here are some of most common secured cards:
Discover it® Secured
1-2% 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter and unlimited 1% cash back on all other purchases
Match Bonus Discover automatically matches the cash back you've earned at the end of your first year, no limits
Bank of America® Customized Cash Rewards Secured Credit Card
1% – 3% 3% cash back in the category of your choice: gas, online shopping, dining, travel, drug stores, or home improvement/furnishings,2% cash back at grocery stores and wholesale clubs, unlimited 1% cash back on all other purchases
Secured credit cards are a lot like regular credit cards in how they work. The primary distinction is that with a secured card, you must make an initial cash deposit to ensure your credit line. Even though your credit history can be used to decide if you can get a secured card, the line of credit matters.
Usually, a deposit of at least $200 is needed for a secured credit card. Your credit limit depends on how much you put down as security. The more you put down, the higher your credit limit will be. For example, if you put down $500 as security, your credit limit becomes $500.
Secured Card Benefits And Drawbacks
Here are the main pros and cons when using a secured credit card:
Good For Poor Credit
Lower credit limits
The major benefit of a secured card is that you do not need a high credit score or any credit score.
With the responsible use of a secured credit card, you can increase your credit score.
With responsible use of a secured card, you can build or increase your credit history, after which you can apply for an unsecured card.
A secured card does not provide benefits and perks like an unsecured card; an unsecured card comes with many extras like cash back, travel rewards, hotel discounts, etc.
A secured credit card comes with a credit limit.
You cannot use the card above the limit, even in emergencies, because going over your credit limit can result in the suspension or cancellation of your account.
What Is An Unsecured Credit Card?
A bank or other financial institution can give you an unsecured credit card if you want to borrow money without putting up any assets as collateral. In other words, you do not have to put up anything to back up the debt you take on.
You can use a credit card to pay for big-ticket items or even everyday costs without taking out any cash. Here are some of the popular unsecured cards:
Chase Freedom Unlimited®
1.5% – 5% 5% on travel purchased through Chase Ultimate Rewards, 3% on dining at restaurants, including takeout and eligible delivery services, 3% on drugstore purchases and 1.5% cash back on all purchases
Up to $300 additional 1.5% cash back on everything you buy (on up to $20,000 spent in the first year)- worth up to $300 cash back
Blue Cash Preferred® Card from American Express
1-6% 6% cash back at U.S. supermarkets (up to $6,000 per year in purchases, then 1%) and selected U.S. streaming subscriptions, 3% cash back on transit and U.S. gas stations, 1% cash back on other purchases
$250 $250 statement credit after you spend $3,000 in purchases on your new Card within the first 6 months
Chase Sapphire Preferred® Card
2X – 5X 5x total points on travel purchased through Chase Ultimate Rewards, 3x points on dining and online grocery purchases and 2x on other travel purchases. Plus, earn 1 point per dollar spent on all other purchases
60,000 points 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening
Citi® Double Cash Card
2%* 2% cash back rewards rate – 1% every time you swipe and another 1% upon payment.
$200 $200 cash back after you spend $1,500 on purchases in the first 6 months of account opening
Capital One Savor Cash Rewards Credit Card
1% – 4% unlimited 4% cash back on dining, entertainment, and popular streaming services, 3% at grocery stores and 1% on all other purchases.
$300 $300 cash bonus once you spend $3,000 on purchases within 3 months from account opening
Unsecured credit cards function by giving you access to a revolving line of credit, allowing you to make purchases up to the approved limit without paying for them during the monthly billing cycle.
As previously stated, you can receive a credit line without providing security. You must pay back this sum by the deadline. The card company will charge interest on the still-owed balance if you do not.
An unsecured credit card has no form of security, which means the risk to the card issuer is relatively large. Therefore, the interest rates on sums owed are very high.
Unsecured Card Benefits And Drawbacks
Here are the main pros and cons when using a unsecured credit card:
Higher Credit Score Requirement
Impulse Spending Lead To Debt
High Credit Limit
If you use an unsecured credit card, you will get rewards for every dollar you spend. It also comes with other perks that will help you pay.
You can choose between cash-back, points, or getting a card with travel rewards.
You can improve your credit history through wise usage of an unsecured card, following which you can apply for a card with better perks and rewards including premium and luxury cards.
Unsecured cards can offer you a monthly limit of $5,000, $10,000, and even more.
As mentioned, an unsecured credit card does not need any deposit and is issued on your credit history; it usually requires at least good credit score.
Usually, unsecured cards have high credit limits, which can lead to impulse spending if not managed responsibly and can deteriorate financial health.
When To Consider A Secured Card?
A secured credit card can help you if you have a low credit score, which makes it hard for you to get an unsecured credit card. People with bad credit or no credit history can benefit from secured credit cards.
Credit card companies offer these cards in exchange for a deposit, making them less risky. But if you wait to pay your bill on time, the company that gave you the credit card can take the money from your deposit. Therefore, it is one of the simplest ways to simultaneously increase your credit score and obtain credit card perks.
The most common reasons consumers apply for secured credit cards are to enhance their credit scores or build a credit history. The credit limits on secured credit cards are often smaller, and the fees associated with using them are typically higher than those of unsecured credit cards.
When To Consider An Unsecured Card?
If you already have a strong credit score and meet the eligibility restrictions stated by the credit card issuer, choosing to apply for an unsecured credit card may be a wise decision for you to make.
Consumers have access to a wide array of rewards and cashback, which they can use to their advantage. There are also co-branded cards where you can get rewards as a loyal customer.
You might have difficulty getting an unsecured credit card if you have bad credit or no credit history. Credit cards are not one-size-fits-all, so it is crucial to consider the options that will help you in the long run.
How To Apply For A Secured Credit Card
It is easy to apply for anything now that everything is online. Secured Credit cards can be helpful when it comes to building a strong and reliable credit history.
- Research: do thorough research by comparing different secured credit cards so you can find the card that fits the needs you are looking for.
- Information required: Information required while applying for a secured credit card are
- Name of the applicant
- Date of birth
- Social security number
- Income proof
- Fill out the application and pay the deposit: After that, you must provide the card issuer with an application complete with all the necessary information so they can process your request. When you apply for the most secured credit cards, you have to put down a deposit.
How To Apply For An Unsecured Credit Card
Applying for an unsecured card is easy if your credit score is in an acceptable range. Here are the steps to apply for an unsecured credit card:
- Understand your needs – are you travel a lot and need a travel credit card? Does a cash-back credit card more relevant for you than a travel card? Do you carry debt and need a 0% intro APR?
- Check your credit score: An unsecured credit card is issued by any lender based on the applicant's creditworthiness, so it is essential to know which cards you can apply with your credit score.
- Compare cards: There are many unsecured credit cards with many different benefits; it is much needed to know them, compare them side by side, and choose which one fits your needs.
- Provide information and apply: After your research, you must provide your personal information, which the lender will require.
- Name of the applicant
- Date of birth
- Social security number
- Income proof
People who want to improve or rebuild their credit score may find that a secured credit card is the best option.
In contrast, people searching for various incentives and advantages will find that unsecured credit cards are the best option for them.
Your purpose, typical purchasing habits, and overall credit profile are the three most important considerations that should guide your decision between an unsecured and secured credit card.