Secured vs. unsecured credit cards: What you should know

Apr 7, 2020

This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

If you have limited to no credit history or currently have a low credit score, you may not be eligible for most credit cards. Sure, you can use cash or a debit card, but these won’t help you build your credit. So, a better option might be to use a secured credit card. Here’s what you should know about secured credit cards. This page includes information about the Discover it Secured that is not currently available on The Points Guy and may be out of date.

New to The Points Guy? Sign up for our daily newsletter and check out our beginner’s guide.

In This Post

What is a secured credit card?

A secured credit card requires a security deposit from the cardholder when the account is opened. This security deposit is usually refundable and generally determines your initial credit limit. Secured credit cards are often used by consumers without credit history or with low credit scores and can be useful for building or repairing credit.

Secured vs. unsecured cards

(Photo by Orli Friedman / The Points Guy)
(Photo by Orli Friedman/The Points Guy)

The fundamental difference between secured and unsecured cards is indicated by the terms: Secured cards require a security deposit while unsecured cards don’t. However, whether you should apply for a secured card or an unsecured card comes down to your credit — especially your credit history and credit score.

Most unsecured cards require at least average credit, since issuers want to avoid the risk posed by consumers with bad and poor credit. You may be able to find an unsecured card that is easy to qualify for even with bad credit, but these cards often have high high interest rates. So, if you have less than average credit, it’s usually a better idea to use a secured card to build your credit before advancing to an unsecured card.

Related reading: The best first credit cards

How secured credit cards work

When you apply for a secured credit card, you generally need to provide your bank account and routing number. If you’re approved, the issuer will withdraw a security deposit from your bank account. The minimum security deposit usually ranges from $49 to $200 for a $200 credit line, but you can often deposit more money to get a higher credit line.

You can use your secured credit card just as you’d use an unsecured credit card. Be sure to make payments on time and use your card responsibly, since most issuers will report your credit activity to the three major credit bureaus. This means your account will appear on your credit report and affect your credit score.

If you use your card regularly and pay your bill on time each month, some issuers may provide additional opportunities, such as an increased credit limit or transitioning your account from secured to unsecured. For example, with the Capital One® Secured Mastercard® you can get access to a higher credit line after making your first five monthly payments on time. For the Discover it® Secured, Discover will review your credit card account monthly, starting at eight months, to determine whether to return your security deposit.

When you close your account or transition to an unsecured account with the same issuer, you’ll get your security deposit back (if it was refundable) as long as there’s no outstanding balance due on your account. Generally, your security deposit will not earn interest.

The information for the Capital One® Secured Mastercard®, Discover it Secured and Citi® Secured Mastercard® has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Why use a secured credit card?

(Photo by The Points Guy)

The primary reason to use a secured credit card instead of cash or a debit card is to build or repair your credit, since most banks report activity on secured credit cards to credit bureaus. There are also other benefits to using a credit card. Most credit cards provide protections that generally aren’t available when you use a debit card or cash, such as no liability on unauthorized purchases. Select secured credit cards also provide other benefits, such as free access to your FICO Score with the Citi® Secured Mastercard® and extended warranty protection with the Capital One® Secured Mastercard®.

Related reading: 3 mistakes people make when they get their first credit card

How to build or repair your credit with a secured credit card

If you’re looking to build or repair your credit with a secured credit card, you should ensure that the card you get will report activity to the credit bureaus. Luckily, most cards that report activity to the credit bureaus advertise doing so.

With a secured credit card, you’ll generally start with a low credit line. So, to build or repair your credit, you’ll initially want to make small, infrequent purchases and focus on paying off your balance in full each month.

The issuer may eventually offer you a higher credit line, which can help your credit score as long as you keep your utilization low and pay off your balance in full every month. It’s also a good idea to check your credit score regularly while working to build or repair your credit.

Do any secured credit cards earn rewards?

Most secured credit cards don’t earn rewards. But, if you’re looking for a secured card that earns rewards and can help you build or repair your credit, the Discover it Secured will likely be your first choice. The card earns 2% cash back at gas stations and restaurants, on up to $1,000 in combined purchases each quarter as well as unlimited 1% cash back on all other purchases. There’s no annual fee on the Discover it Secured and like other Discover it cards, Discover will match the cash back you earn during your first year.

A $200 deposit, bank information and your tax return are required to open your account, but Discover will automatically start reviewing your account monthly after it has been open for eight months to see if you can transition to an unsecured line of credit.

Another option is the SkyPass Visa Secured Card from U.S. Bank. The card offers 5,000 SkyPass bonus miles after your first purchase and 1,000 bonus miles at renewal. All purchases earn 1 point per dollar spent and the card carries a $50 annual fee. Korean SkyPass offers some pretty great sweet spot award redemptions, including round-trip business class flights to Europe for just 80,000 miles.

Featured image by Isabelle Raphael/The Points Guy.

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.