Credit cards can be helpful tools for building a better credit score. It is often a necessary step to help you buy bigger things in the future, such as a home or a car. However, credit cards can be challenging to obtain if you do not already have excellent credit. That is where secured credit cards come into the picture. Here's what you need to know about secured vs. unsecured credit cards to decide which one has the most to offer you.

What is an Unsecured Credit Card?

An unsecured credit card does not require an upfront deposit to serve as "security" for the card. These typically require a solid repayment history and a good or better credit score. Many unsecured credit cards offer perks or rewards that aren't available with secured credit cards (such as travel miles or cash-back rewards). They also generally have lower APRs (annual percentage rates) and higher credit limits than secured credit cards offer. Some will even offer attractive introductory offers and balance transfer options to entice users to their cards. The downside is that you need a good credit score to qualify for these cards.

What is a Secured Credit Card?

As the name implies, a secured credit card requires a security deposit to open the credit account. In most cases, the security deposit is the limit for the card. However, some will offer a slightly higher initial credit limit. Most, though, will have a credit limit equal to your initial deposit, which will be returned to you when you close the account (provided you do not default on the debt) or after you reach a certain trust threshold with the credit card company.

Once you have a secure credit card, it works like any other one. You must make minimum monthly payments, though paying your balance in full each month is highly recommended. Interest rates apply to any balance carried over from one payment period to the next. Your payments, or non-payments, are reported to credit bureaus as with an unsecured credit card.

Difference Between Unsecured and Secured Cards

Understanding the differences between secured and unsecured credit cards is essential to make wise decisions when selecting credit cards. Let's review the significant differences.

Credit Requirements

Because your deposit secures the card and there is less risk to lenders, the credit requirements for secured credit cards are more relaxed. That means consumers can qualify for these credit cards even if their credit score is less than stellar. Unsecured cards, in contrast, often have more stringent credit requirements for entry.

Credit Limits

With most secured credit cards, your deposit is your credit limit. However, some credit card companies have limits on the amount your initial deposit can be, often between $200 and $1,000. Unsecured credit cards extend credit based on your credit score, which means you may have a much higher credit limit which can be a plus or a minus, depending on your self-control.

Interest Rates and Fees

Secured credit cards, typically aimed at individuals working on establishing or reestablishing their credit, often come with higher interest rates. Conversely, unsecured credit cards may impose substantial annual percentage rates (APRs) and additional charges on consumers with lower credit scores, a history of late payments, or a lack of credit history altogether. Therefore, it's crucial to meticulously read and understand the terms and conditions when weighing different credit card options. Despite appearances, some unsecured credit cards, due to their added fees, may be more expensive than their secured counterparts.

Rewards and Benefits

Most secured cards do not offer rewards and similar benefits to consumers. If this is important, you'll have to look harder to find one (they do exist but often have more stringent qualifications than other secured credit cards). Many unsecured credit cards offer cash-back rewards, points rewards, or travel rewards. The better your credit score, the more value you can gain from these programs.

Choosing an Unsecured or Secured Credit Card

The best philosophy to utilize when exploring credit card options is that credit cards are tools for building credit. When you approach your credit card search with that in mind, you can seek out cards that advance your goals for building better credit, achieving specific goals, or obtaining a better financial outlook for your future. Whether the best choice for you is an unsecured or a secured credit card often depends on your current credit situation and overall credit and spending goals.