Secured vs. Unsecured Credit Cards

Secured vs. Unsecured Credit Cards

May 11, 2015         Written By Jason Steele

Credit cards are a vital tool for many Americans. Not only do these products allow access to a secure and convenient line of credit, but it can be difficult to reserve a hotel room or to rent a car without one. In addition, credit cards offer robust benefits that cannot be matched by cash, checks, or even debit cards.

But unfortunately, some people are unable to qualify for most cards due to their troubled credit history. Some applicants may have experienced hardships such as illness, divorce, or job loss, while others such as recent immigrants and young adults may not have any credit history. For whatever reason people may find themselves in this position, their only option may be to apply for a secured credit card.

What it a secured credit card?

A secured credit card like the Capital One Secured card is actually much like a standard, unsecured credit card, but with one key difference. To open a secured credit card account, applicants must submit a refundable security deposit, which becomes their credit limit in most cases. Yet from then on, the card works exactly like a standard credit card account. Cardholders make charges, and must make at least the minimum payment each month. If the card has a grace period, those who pay the entire statement bill in full, by the due date, will have their interest charges waived. When the balance is paid off and the account is closed, the deposit is refunded unless the account holder is in default.

The advantages of a secured card

The primary strength of a secured credit card is the fact that nearly everyone who applies will be approved. In most cases, secured card issuers only require that the applicant verifies his or her identity, and that all bankruptcies be discharged. Otherwise, there is typically no credit score or credit history requirement.

After being approved for a secured card, you can begin building or rebuilding your credit history, as the card issuer will report your payments to the major consumer credit bureaus. In most cases, when secured credit card account holders make their payment on-time each month, they will be eligible to apply for a standard, non-secured credit card after a year.

Other benefits of secured credit cards can include $0 liability fraud protection, emergency card replacement, and even rental car collision damage waiver coverage. Furthermore, secured cards are still covered by the Fair Credit Billing Act of 1974 (FCBA). This means that cardholders are not responsible for fraudulent transactions, and retain the right to request a chargeback whenever the goods or services they paid for were received. In fact, this is one of the key advantages that all credit cards have over other forms of payment, including debit cards.

The drawbacks of a secured card

For all of their advantages, secured credit cards do have a few drawbacks. First, there is the requirement to submit a refundable security deposit, which can be challenging for people who do not have sufficient cash savings. In addition, secured cards will always have an annual fee, while standard, non-secured cards frequently do not. Secured cards also have relatively high interest rates compared to some of the more competitive non-secured cards.

In addition, secured credit cards will have a much more limited slate of benefits than a non-secured card such as travel insurance and purchase protection policies. And finally, secured cards represent a great opportunity to improve your credit history and increase your credit score, but only if you always make your payments on time, and control your debt. However, if you fail to make the minimum payments on time each month, it will be reported to the consumer credit bureaus and your score will not rise.

The benefits of a standard, unsecured card

The most important benefit of having a standard, unsecured card such as the Barclaycard Rewards MasterCard or the Capital One Platinum card is that you do not have to submit a deposit, so you are truly extended a line of credit. In addition, these products will often have lower fees and interest rates than secured cards, as well as much more comprehensive benefits. For example, airline credit cards may offer priority boarding and free checked bags, while hotel credit cards can offer elite status that results in upgraded rooms, late checkouts, and even free breakfast.

Additionally, standard credit cards can offer generous sign-up bonuses as well as rewards in the form of points, miles, or cash back. In contrast, there are very few secured cards that offer any rewards, and those programs are minimal at best. Finally, standard credit cards are offered by nearly all banks and credit unions, while only a select few institutions offer secured credit cards.

Final word

Secured credit cards are not the ideal products for most people, but they can be an incredibly valuable tool for people with a troubled, or just a limited credit history. By using a secured card responsibly, and making each month’s payment on-time, secured credit card users can rapidly improve their credit scores and graduate to a standard unsecured card.

America is not only the land of opportunity, but a place where everyone can get a second chance. When you need to build your credit, but are unable to qualify for a standard credit card, a secured card can offer you that opportunity.

The information contained within this article was accurate as of May 11, 2015. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and may be compensated if you take action with any of our affiliate partners.


About Jason Steele

Jason Steele is a journalist that covers credit cards, travel and consumer credit. As one of the nation's leading experts in credit cards, Jason has contributed to dozens of travel and personal finance outlets including NerdWallet, Credit Karma and the Points Guy, where he serves as the Senior Points and Miles Contributor. Jason has also been widely quoted in mainstream media in outlets such as the Washington Post, the USA Today and Bloomberg Business Week. Jason is also the founder and producer of CardCon, which is the annual Conference for Credit and Credit Card Media.
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