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Do you really need a secured card if you have bad credit?

Dec. 14, 2020
9 min read
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Whether you're buying a home, leasing a vehicle, or applying for a new credit card, a healthy credit score has a significant impact on attaining a low-interest rate or upping your approval odds. More so, if you have poor credit or no credit history, getting a loan or line of credit may prove to be a challenging quest towards your financial goals.

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A commonly suggested strategy to help build — or rebuild — your credit score, is to apply for a secured credit card. A secured credit card requires a refundable security deposit in exchange for a line of credit when the account is opened. This security deposit generally determines your initial credit limit. Most secured cards do not provide any sort of rewards program, come with high-interest rates (that won't matter if you pay off your balance each month), and some even tack on annual fees.

While signing up for a secured credit card is a reasonable first step in improving your credit, you may want to also consider an unsecured credit card. Unsecured credit cards are the most common type of credit card and many products are actually designed for people who want to establish or build their credit. These types of cards do not require a security deposit and many entry-level unsecured cards have lenient approval odds in parallel with secured credit cards.

Today, we take a look at some important factors to determine whether you need a secured card to boost your credit.

Check your credit score first

(Photo by Victor Metelskiy/Getty Images)

Before you click 'submit' on that new credit card application, make sure you've checked your credit score. Luckily, there are many ways to check your credit score for free. And, many credit cards offer a free FICO Score to cardholders. By knowing your score beforehand, you'll have a better idea of what credit card products you may qualify for and what interest rates to expect.

Credit scores range between 300-850, with a credit score of 720 or above considered excellent, 690-719 is considered good, 630-689 is considered average, and anything under 630 is considered bad. For example, if your score is in the 500's, you'll likely have a hard time getting approved for an unsecured credit card. Yet a score in the 600's, and you may now be eligible for more cards (both secured and unsecured) options.

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Make sure your credit is reported to the three major bureaus

The reason a credit card is such a useful tool for rebuilding your credit is that credit issuers report your credit card balances to the three major credit reporting agencies — Equifax, Experian, and TransUnion. If you're paying on time and your credit card balance in full each month, you're likely going to experience a rise in your credit score over time.

If you own an unsecured credit card, that account information is guaranteed to be on your credit report. The majority of unsecured cards issued by major banks report to the three credit bureaus but some may only report to one or two. However, not all secured credit cards report to all three major credit bureaus. And getting the wrong card when you’re trying to improve your credit score can prevent you from achieving your financial goal. To be on the safe side, before applying for a credit-boosting card, double-check with the credit card issuer to make sure it reports your account activity to all three credit bureaus.

You can also check out CreditBoards.com, a useful resource with information about credit card applications, to help you figure out which credit report will likely be pulled for your application. The likelihood is that the credit issuers also report your monthly credit card activity to this same bureau.

Security deposits are required on certain cards

Contrary to secured credit cards, unsecured cards do not require a security deposit for approval and are available to consumers of all types of credit scores. A deposit is the main differentiating factor between an unsecured card and a secured card. The deposit required by lenders on their secured card products covers them if a borrower fails to pay off their credit card balance in full every month. The amount you put down as a deposit is essentially your credit limit.

(Photo by John Gribben for The Points Guy)

Many secured card issuers require a deposit of at least a few hundred dollars to open an account. For example, the popular OpenSky Secured Visa Credit Card and Discover it Secured Card require a $200 minimum security deposit upfront. Keep in mind that lenders put restrictions on the maximum amount deposit, so if you need a higher credit limit, you may want to look at unsecured card options. The information for the Discover it Secured has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Higher interest rates with secured cards

In addition to the deposit, secured cardholders may face non-refundable costs such as annual fees, monthly maintenance charges and higher interest rates than unsecured cards. APRs tend to be significantly higher for secured credit cards than unsecured versions as borrowers of secured cards usually are a riskier business proposition for credit issuers. However, as long as you’re using your credit responsibly and paying off your entire balance each month, the additional fees that accompany certain secured cards should not be of concern to you.

If you need a bit more wiggle room with your credit card purchases, you may want to consider a credit card that offers 0% APR for an introductory period on new purchases. These cards are normally unsecured, and therefore you must be disciplined to ensure you pay off your entire balance before the 0% APR promotional period ends, to avoid high-interest charges.

You can avoid annual fees

Several popular secured credit cards do not incur an annual fee, but if they do, it's usually under $50. This annual fee is tacked on to add some guarantee for the lender and mitigate the risk of lending money to individuals who could potentially default on their credit card balance. With so many card options to choose from, you should assess both unsecured and secured options to determine whether you can avoid an annual fee.

You may be surprised to find out that there are several unsecured cards, many without an annual fee, that have lenient approval odds—even with subpar credit. These cards deliver attractive rewards and ongoing benefits for cardholders. More so, if you're working on improving your credit but have an above-average score, you may as well look at the best starter travel cards on the market. Otherwise, prioritize credit improvement, and choose a card without an annual fee that's right for you.

Credit limit restrictions

With secured credit cards, the amount of your security deposit is the amount of your credit limit. Because there's a maximum amount you can put down for a security deposit on secured cards, there's a strong probability that your credit limit may be higher with an unsecured credit card. Of course, this factor is determined by your creditworthiness, and lenders have been known to increase your credit limit if you've demonstrated six months or more of responsible credit behavior.

The reason your credit limit is so important is that credit utilization is a critically important factor in determining how your credit score fluctuates each month. In fact, it makes up as much as 30% of your total credit score. It’s the percentage of the amount of credit you are using compared to the amount of credit available to you, as reported by the three credit bureaus.

Generally, a higher credit limit with a low credit utilization ratio (keeping it under 30% would be wise) helps you see an upswing in your credit score. For example, if you apply for a secured credit card and put down $500 as your security deposit, the $500 now becomes your credit limit. If you were to spend $250 of the total $500 credit limit available, your balance-to-limit ratio as a percentage would be 50%. In other words, you’re using a whopping 50% of the credit limit on your account.

A higher credit utilization ratio shows you're a high financial risk, as you're likely to overextend your debts. With credit utilization making up as much as 30% of your total credit score, it's imperative to keep your spend manageable so you can pay your balance in full every month, and a generous credit limit only helps that cause.

Bottom line

While secured credit cards are specifically designed for people with less-than-stellar credit, there are plenty of valuable no-annual-fee unsecured credit cards that can help increase your credit score after months of responsible credit management. Whether you're a credit card novice or have had ups and downs managing your credit, make sure to examine the terms of secured and unsecured card products thoroughly to determine what type of card aligns with your needs.

If you want to learn even more about credit, check out these links:

(Featured photo by Photo by Justin Paget/Getty Images)

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

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TPG featured card

Best for the well-traveled foodie
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review
Apply for American Express® Gold Card
at American Express's secure site

Rewards

3 - 4X points
4XEarn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S.
4XEarn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
3XEarn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.

Intro offer

60,000 bonus points
Earn 60,000 Membership Rewards® points after you spend $4,000 on eligible purchases with your new Card within the first 6 months of Card Membership.

Annual Fee

$250

Recommended Credit

670-850
Excellent/Good
Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

Why We Chose It

There's a lot to love about the Amex Gold card. It's been a fan favorite during the pandemic because of its fantastic rewards rate on restaurants (that includes takeout and delivery in the U.S.!) and U.S. supermarkets. If you're hitting the skies soon, you'll also earn bonus points on travel. Paired with up to $120 in Uber Cash (for U.S. Uber rides or Uber Eats orders) and up to $120 in annual dining statement credits at eligible partners, there's no reason that the foodie shouldn't add this card to their wallet. Enrollment required.

Pros

  • 4x on dining at restaurants and U.S. supermarkets (on the first $25,000 in purchases per calendar year; then 1x)
  • 3x on flights booked directly with the airline or with Amex Travel
  • Welcome bonus of 60,000 points after spending $4,000 in the first six months

Cons

  • Weak on travel outside of flights and everyday spending bonus categories
  • Not as useful for those living outside the U.S.
  • Some may have trouble using Uber/food credits
  • Few travel perks and protections
  • Earn 60,000 Membership Rewards® points after you spend $4,000 on eligible purchases with your new Card within the first 6 months of Card Membership.
  • Earn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S., and earn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
  • Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
  • $120 Uber Cash on Gold: Add your Gold Card to your Uber account and each month automatically get $10 in Uber Cash for Uber Eats orders or Uber rides in the U.S., totaling up to $120 per year.
  • $120 Dining Credit: Satisfy your cravings and earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, Milk Bar and select Shake Shack locations. Enrollment required.
  • Choose the color that suits your style. Gold or Rose Gold.
  • No Foreign Transaction Fees.
  • Annual Fee is $250.
  • Terms Apply.
  • See Rates & Fees
Apply for American Express® Gold Card
at American Express's secure site
Terms & restrictions apply. See rates & fees
Best for the well-traveled foodie
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

4XEarn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S.
4XEarn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
3XEarn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
  • Intro Offer
    Earn 60,000 Membership Rewards® points after you spend $4,000 on eligible purchases with your new Card within the first 6 months of Card Membership.

    60,000 bonus points
  • Annual Fee

    $250
  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    670-850
    Excellent/Good

Why We Chose It

There's a lot to love about the Amex Gold card. It's been a fan favorite during the pandemic because of its fantastic rewards rate on restaurants (that includes takeout and delivery in the U.S.!) and U.S. supermarkets. If you're hitting the skies soon, you'll also earn bonus points on travel. Paired with up to $120 in Uber Cash (for U.S. Uber rides or Uber Eats orders) and up to $120 in annual dining statement credits at eligible partners, there's no reason that the foodie shouldn't add this card to their wallet. Enrollment required.

Pros

  • 4x on dining at restaurants and U.S. supermarkets (on the first $25,000 in purchases per calendar year; then 1x)
  • 3x on flights booked directly with the airline or with Amex Travel
  • Welcome bonus of 60,000 points after spending $4,000 in the first six months

Cons

  • Weak on travel outside of flights and everyday spending bonus categories
  • Not as useful for those living outside the U.S.
  • Some may have trouble using Uber/food credits
  • Few travel perks and protections
  • Earn 60,000 Membership Rewards® points after you spend $4,000 on eligible purchases with your new Card within the first 6 months of Card Membership.
  • Earn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S., and earn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
  • Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
  • $120 Uber Cash on Gold: Add your Gold Card to your Uber account and each month automatically get $10 in Uber Cash for Uber Eats orders or Uber rides in the U.S., totaling up to $120 per year.
  • $120 Dining Credit: Satisfy your cravings and earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, Milk Bar and select Shake Shack locations. Enrollment required.
  • Choose the color that suits your style. Gold or Rose Gold.
  • No Foreign Transaction Fees.
  • Annual Fee is $250.
  • Terms Apply.
  • See Rates & Fees