Secured vs. Unsecured Credit Cards: What’s the Difference?
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What is a secured credit card?
A secured credit card is a card that requires a cash security deposit when you open the account. The deposit reduces the risk to the credit card issuer: If you don't pay your bill, the issuer can take the money from your deposit. That's why these cards are available to people with bad credit or no credit.
The deposit is usually equal to your credit limit, so if you deposit $200, you'll have a $200 limit. Use the card responsibly, and you can improve your credit enough to qualify for an unsecured card — one that doesn't require a deposit.
Some of the best secured cards allow you to upgrade your account directly to an unsecured card. Others don't have an upgrade process, so you'll have to apply elsewhere, then close the secured card. When you upgrade a secured card or close the account in good standing (meaning you're paid up), the issuer gives you back your deposit.
The minimum and maximum amount you can deposit varies by card, but you should be prepared to come up with at least $200 for a secured card deposit.
Secured credit cards vs. unsecured credit cards
Whether you need a secured card comes down to how good your credit is.
For unsecured cards, which don't require a deposit and therefore pose more risk to the issuer, credit-card companies typically require at least average credit, and good or excellent credit for the best ones.
Some unsecured credit cards advertise themselves as easy to qualify for even if you have bad credit. But these cards usually charge extremely high fees. NerdWallet recommends applying for a secured card rather than a high-fee unsecured card.
How secured credit cards work
Once the initial deposit is paid, secured cards work just like unsecured ones:
You can use them wherever credit cards are accepted, including online.
Your bill comes monthly, and you pay for the purchases you've made. (Your deposit is not used to pay for purchases. See the difference between secured and prepaid cards, below.)
You incur interest if you carry a balance.
You can build or rebuild your credit by using the card responsibly and paying your balance on time.
Most major credit card issuers offer both secured and unsecured cards. Annual fees are common, but you shouldn't pay more than $50. You can find multiple options with no annual fee at all among our favorite secured cards.
If you can't qualify for an unsecured card, a secured card can be a great tool as you look to improve your credit. But it's as important to be responsible with a secured card as it is with any other loan or bill that shows up on your credit report.
Secured credit cards: Examples
While secured credit cards all work the same way — pay a deposit, use the card, build credit, get your deposit back and move to an unsecured card — they come with different features. For example:
Flexible deposits and credit lines: The Capital One Platinum Secured Credit Card typically requires a $200 minimum deposit, but some applicants may be able to get a $200 credit line with a $49 or $99 deposit. You can deposit up to $1,000 to get a higher credit line. Unlike with most secured cards, you can pay your deposit in installments. And if you make on-time payments, you may be considered for a higher credit line without depositing more money. Annual fee: $0.
Automatic account reviews: With the Discover it® Secured Credit Card, your account will be automatically reviewed for an upgrade to an unsecured card after seven months. This card also has rewards — 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter; all other purchases earn 1%. Annual fee: $0. Minimum deposit: $200; maximum: $2,500.
No credit check: The OpenSky® Secured Visa® Credit Card doesn't have great unsecured cards to upgrade to. But there's no credit check required to get this card, so even people with badly damaged credit might qualify, even if they've been rejected for other secured cards. This comes at a cost, though: an annual fee of $35. Minimum deposit: normally $200; maximum: $3,000.
Rewards: The Capital One Quicksilver Secured Cash Rewards Credit Card earns 1.5% cash back on all purchases — the same rewards offered by the regular Quicksilver card for people with good to excellent credit. Annual fee: $0. Minimum deposit: $200; maximum: $1,000 to $3,000.
Secured credit cards vs. prepaid debit cards
Prepaid debit cards seem similar to secured credit cards. You have to pay money before you can use the card, and they typically have a Visa, MasterCard or American Express logo.
But with prepaid debit cards, you're using your own money to make purchases — not money borrowed from the issuer. You load money onto the card, then the issuer uses that money to pay for your purchases.
Since these cards don't extend any credit, account activity isn't reported to the credit bureaus. Therefore, you're not building a credit history by using a prepaid card. Prepaid debit cards can also have fees that secured credit cards do not.
If building credit is your goal, a secured credit card is really your best bet.
How to use a secured credit card to build credit
Although they require a deposit, secured credit cards are a powerful tool for rebuilding credit. Here's how to use one most effectively:
Use the card sparingly, making only one or two small purchases every month. Try not to let your balance ever exceed 30% of your credit limit. Keeping it under 10% is even better.
Pay your balance in full every month before the due date. When you pay in full, you won't be charged interest. Interest rates on secured cards are generally higher than those on unsecured cards.
Keep an eye on your credit score over time; when it has meaningfully improved, ask your issuer about upgrading to an unsecured card.
How fast does a secured card build credit?
Many people find that by using a secured card carefully, it takes six months to a year to improve their credit score enough that they're able to qualify for an unsecured card. Some issuers will let you transfer your secured line of credit to an unsecured one, which is better for your credit score because it doesn't require you to open a new account.
But even if you do have to apply for a new unsecured credit card, you may be able to enjoy some of the benefits of having good credit — lower interest, rewards and more competitive fees.
When that day comes, your time rebuilding your credit with a secured credit card will have been worth it.
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