Secured vs. Unsecured Credit Cards: Key Differences

Introduction

Credit cards are an essential part of modern financial management, offering convenience, rewards, and a way to build credit. However, not all credit cards work the same way. The two primary types are secured credit cards and unsecured credit cards. Secured credit cards, such as the Discover It Secured Card, require a cash deposit as collateral, making them ideal for individuals with no credit history or bad credit. Unsecured credit cards, like the Wells Fargo Active Cash Card or Capital One Spark Business Card, do not require a deposit and are the standard option for most consumers. The key difference lies in approval requirements, credit limits, and risk levels. Understanding when to choose a secured credit card vs. an unsecured credit card is crucial for building credit, managing debt, and maximizing financial benefits. This guide explores their differences, advantages, and when to use each.

What Is a Secured Credit Card?

A secured credit card is a type of credit card that requires a cash deposit as collateral. This deposit typically determines the credit limit, meaning if you deposit $500, your credit limit is usually $500. Secured cards are often used by individuals who are building or rebuilding their credit.

How Secured Credit Cards Work

• You apply for the card and make a security deposit, which acts as collateral.
• Your credit limit is usually equal to or slightly higher than your deposit.
• The card works like a regular credit card—you can make purchases, pay bills, and earn rewards (on some cards).
• Payments are reported to credit bureaus, helping build or rebuild your credit score.
• After demonstrating responsible use, some issuers may upgrade you to an unsecured credit card or return your deposit.

Pros of Secured Credit Cards

• Easier approval, even for individuals with poor or no credit history.
• Helps build credit when used responsibly.
• Some secured cards, like the Discover It Secured Card, offer cashback rewards.
• Lower financial risk compared to unsecured credit cards.

Cons of Secured Credit Cards

• Requires an upfront deposit, which ties up funds.
• Lower credit limits compared to unsecured credit cards.
• Some secured cards have higher interest rates and fees.

What Is an Unsecured Credit Card?

An unsecured credit card is a standard credit card that does not require a security deposit. Issuers approve applicants based on their credit score, income, and financial history. Examples of popular unsecured credit cards include the Wells Fargo Active Cash Card, Citi Custom Cash Card, and Amex Platinum Card.

How Unsecured Credit Cards Work

• Issuers determine your credit limit based on your creditworthiness.
• You can make purchases up to your credit limit and are required to make monthly payments.
• Interest applies if you carry a balance beyond the due date.
• Some cards offer rewards, such as cashback, airline miles, or travel perks.
• Regular, on-time payments improve your credit score.

Pros of Unsecured Credit Cards

• No security deposit required.
• Higher credit limits compared to secured cards.
• Access to better rewards programs, such as the Capital One Venture Card for travel or the Citi Double Cash Card for cashback.
• More options for 0% APR promotions and balance transfer offers.

Cons of Unsecured Credit Cards

• Higher approval requirements—you need good to excellent credit.
• Risk of higher interest rates if you carry a balance.
• Easy access to credit can lead to overspending and debt accumulation.

Key Differences Between Secured and Unsecured Credit Cards

Feature	Secured Credit Cards	Unsecured Credit Cards
Deposit Required	Yes, upfront security deposit	No deposit required
Credit Limit	Equals deposit amount	Based on creditworthiness
Approval Requirements	Easier approval for bad/no credit	Requires good to excellent credit
Credit Building	Ideal for building/rebuilding credit	Helps maintain or improve credit
Rewards and Benefits	Limited rewards (some cards offer cashback)	Extensive rewards like travel points and cashback
Interest Rates	Generally higher	Lower for good credit holders
Risk Level	Low risk for issuers, as deposit secures debt	Higher risk for issuers, as no collateral is required

When to Choose a Secured Credit Card

A secured credit card is the right choice if:

• You have no credit history or bad credit.
• You are rebuilding credit after past financial mistakes.
• You need a credit card but can’t qualify for an unsecured card.
• You can afford to put down a refundable deposit.
• You want a low-risk way to establish credit before upgrading.

Example:

Mark is a recent college graduate with no credit history. He applies for the Discover It Secured Card, deposits $300, and uses it for small purchases. By paying in full each month, his credit score improves, and he later qualifies for an unsecured credit card with better rewards.

When to Choose an Unsecured Credit Card

An unsecured credit card is better if:

• You have a good or excellent credit score (typically 670+).
• You want higher credit limits and better perks.
• You don’t want to put down a security deposit.
• You qualify for 0% APR credit cards or balance transfer offers.
• You want to earn cashback or travel rewards.

Example:

Sarah has a credit score of 750 and qualifies for the Wells Fargo Active Cash Card, which offers unlimited 2% cashback on purchases. Since she pays her balance in full each month, she avoids interest charges while earning rewards.

Can You Upgrade a Secured Credit Card to an Unsecured Credit Card?

Yes, many secured cards offer graduation options. If you make on-time payments for 6-12 months, some issuers will:

• Convert your secured card into an unsecured card.
• Refund your security deposit.
• Increase your credit limit without requiring additional deposits.

Cards like the Discover It Secured Card or Capital One Secured Mastercard offer credit review programs that upgrade responsible cardholders.

FAQs for Secured vs. Unsecured Credit Cards – Key Differences

1. What is the main difference between a secured and an unsecured credit card?

The primary difference between a secured credit card and an unsecured credit card is the requirement of a security deposit. A secured credit card requires an upfront deposit that acts as collateral, typically equal to the credit limit. This deposit minimizes risk for the issuer, making it easier for individuals with low or no credit history to get approved. In contrast, an unsecured credit card does not require a deposit, and approval is based on creditworthiness, income, and financial history.

Secured credit cards are ideal for credit-building and are often used as a stepping stone to unsecured credit cards. Unsecured credit cards, like the Wells Fargo Active Cash Card or Citi Double Cash Card, provide higher credit limits, rewards, and lower interest rates for individuals with good to excellent credit. Choosing between the two depends on your credit score, financial goals, and ability to manage credit responsibly.

2. How does a secured credit card help build credit?

A secured credit card is one of the best tools for building or rebuilding credit because payment activity is reported to the major credit bureaus (Experian, Equifax, and TransUnion). When you use a secured credit card and make on-time payments, your credit score improves over time.

For example, if you have no credit history or past financial difficulties, using a secured card like the Discover It Secured Card and maintaining a low credit utilization ratio (below 30%) can help establish positive credit habits. Many issuers, such as Capital One and Wells Fargo, offer secured cards with the option to upgrade to an unsecured card after several months of responsible use.

Since secured credit cards have lower risk for issuers, they are easier to qualify for than unsecured cards, making them an excellent choice for credit-building and financial recovery.

3. Who should get a secured credit card instead of an unsecured credit card?

A secured credit card is best suited for individuals who:

• Have no credit history (e.g., students or young adults).
• Have bad credit or a low credit score due to missed payments, bankruptcies, or defaults.
• Have been denied an unsecured credit card and need a way to build credit.
• Can afford a refundable security deposit to establish a credit line.
• Want to transition to an unsecured card over time by proving creditworthiness.

For example, someone who is new to credit may start with a secured card like the Capital One Platinum Secured Card, make regular payments, and later qualify for a higher-limit unsecured credit card like the Chase Freedom Unlimited. A secured card helps lay the foundation for a strong credit profile, making it easier to qualify for better financial products in the future.

4. What are the advantages of using an unsecured credit card?

Unsecured credit cards offer several benefits, including:

• No security deposit required, allowing access to credit without upfront costs.
• Higher credit limits compared to secured cards, providing more spending flexibility.
• Rewards programs, such as cashback (Citi Double Cash), travel perks (Chase Sapphire Preferred), and airline miles (Capital One Venture Card).
• Lower interest rates for those with good to excellent credit.
• Access to introductory 0% APR offers, making them ideal for balance transfers and large purchases.

Unsecured cards are best for individuals with an established credit history who want to maximize rewards, lower borrowing costs, and enjoy financial flexibility. However, they require responsible credit management, as high credit limits and easy access to credit can lead to overspending and debt accumulation.

5. Can you upgrade a secured credit card to an unsecured credit card?

Yes, many issuers allow you to upgrade a secured credit card to an unsecured credit card after demonstrating responsible credit use. Typically, this happens after 6 to 12 months of on-time payments and low credit utilization.

For example, the Discover It Secured Card and Capital One Secured Mastercard offer automatic reviews to determine eligibility for an upgrade. If approved, your security deposit is refunded, and you are issued an unsecured credit card with a higher credit limit.

To increase your chances of an upgrade, follow these steps:

1. Make all payments on time (never miss a due date).
2. Keep credit utilization low (use less than 30% of your credit limit).
3. Avoid applying for multiple new accounts, which can lower your credit score.
4. Monitor your credit score regularly to track improvements.

Upgrading to an unsecured card unlocks better benefits, including higher limits, lower interest rates, and rewards programs.

6. How does a security deposit work on a secured credit card?

A security deposit is an upfront payment made when opening a secured credit card, which serves as collateral for the issuer. This deposit reduces risk, allowing individuals with poor or no credit history to qualify for a credit card.

The deposit amount typically determines the credit limit. For example, if you deposit $500, your credit limit will be $500. Some issuers may increase your limit without requiring an additional deposit after several months of responsible use.

Many secured cards, like the Discover It Secured Card, refund your deposit once you graduate to an unsecured card. However, if you default on payments, the issuer may use your deposit to cover the balance.

Since the deposit is refundable, secured credit cards provide a low-risk way to establish or rebuild credit, making them an excellent choice for credit beginners and those recovering from financial setbacks.

7. Are there secured credit cards that offer rewards?

Yes, some secured credit cards offer rewards, although they are less common than unsecured rewards cards. For example:

• The Discover It Secured Card offers 2% cashback at gas stations and restaurants and 1% on all other purchases.
• The Capital One Quicksilver Secured Card provides 1.5% cashback on all purchases.

These secured cards allow credit-builders to earn rewards while improving their credit scores. However, most secured cards do not offer perks like travel benefits, signup bonuses, or premium rewards, which are typically found in unsecured cards like the American Express Platinum or Chase Sapphire Preferred.

If your goal is to earn rewards while building credit, choosing a secured card with cashback options can provide added benefits while helping you transition to a higher-tier unsecured card over time.

8. How do secured and unsecured credit cards affect credit scores?

Both secured and unsecured credit cards impact credit scores similarly, as long as the issuer reports to the three major credit bureaus. Factors that affect your credit score include:

• Payment history (35%) – Making on-time payments boosts your credit score.
• Credit utilization (30%) – Keeping balances below 30% of your credit limit helps maintain a strong score.
• Length of credit history (15%) – Keeping accounts open longer improves credit.
• Credit mix (10%) – Having a mix of credit cards, loans, and other credit types enhances scores.
• New credit inquiries (10%) – Applying for multiple new accounts can temporarily lower your score.

A secured credit card is an excellent tool for building credit from scratch, while an unsecured credit card can help maintain and improve an existing score.

9. Can I have both a secured and an unsecured credit card?

Yes, it is possible and sometimes beneficial to have both a secured and an unsecured credit card. For example:

• A secured card can help establish or rebuild credit.
• An unsecured card can provide higher limits and rewards.

If you already have a secured card and qualify for an unsecured card, keeping both accounts open improves your credit mix and credit history, which can increase your credit score over time.

10. Which type of credit card is better for long-term financial health?

For long-term financial health, an unsecured credit card is generally the better choice, as it offers higher credit limits, lower interest rates, and rewards. However, if you are building credit, starting with a secured card and transitioning to an unsecured card is the best strategy.

Conclusion:

• If you have bad credit or no credit, start with a secured credit card like the Discover It Secured Card.
• If you have good to excellent credit, apply for an unsecured credit card like the Citi Custom Cash Card or Chase Freedom Unlimited.
• If you want to build credit and later upgrade, choose a secured card with an upgrade path.
• If you want high rewards and perks, go for an unsecured rewards card like the Amex Platinum or Capital One Venture Card.

Both secured and unsecured credit cards serve different financial needs. Choosing the right one depends on your credit score, financial goals, and spending habits. By making responsible payments, managing your credit utilization, and avoiding unnecessary debt, you can maximize the benefits of whichever credit card you choose.