Both secured and unsecured credit cards let you borrow money and help build your credit history. Secured credit cards, however, require a security deposit up front, often acting as both your credit limit and collateral if you fail to make payments. In the article below, we’ll review the differences between traditional and secured credit cards, including the qualifications, initial costs, and benefits of each card type.
What is the main difference between a secured and unsecured credit card?
Unlike unsecured, traditional credit cards, secured credit cards require a deposit as collateral if you default on payments. Essentially, the deposit on a secured credit card helps reduce the issuer’s risk. Don’t think of it as a prepayment for purchases. You will have to repay everything you charge to the card. However, if you fail to repay your balance, the issuer may use the deposit to help cover your debt.
In contrast, your credit limit on a traditional credit card is usually based on your credit score and financial position, which considers your existing debt and current income as well as the issuer’s lending criteria. A secured card, according to the Financial Consumer Agency of Canada, will usually grant a credit limit that is the same as, or higher than your deposit. If you want a larger credit limit, this usually means a greater deposit. Note that interest may still apply if you end up carrying a balance, regardless of the type of credit card you select.
Secured vs. unsecured credit cards: key differences
There are several ways that secured and unsecured credit cards differ.
Feature | Secured credit card | Unsecured credit card |
Security deposit | Required | Not required |
Approval | Often more accessible for those who have limited or damaged credit | Usually depends on creditworthiness and current income |
Credit limit | Typically connected to the deposit amount | Set by the issuer based on their lending criteria |
Interest and fees | Vary by card. May include setup fees | Varies widely by card |
Rewards and benefits | Often limited, though some cards offer rewards | Broader selection of rewards, insurance and travel benefits |
Best suited to | Building (or rebuilding) your credit score | Borrowers who qualify without collateral |
Who may benefit from a secured credit card?
If you have trouble qualifying for an unsecured credit card, then a secured option might be a good fit. This is especially true for Canadians or newcomers to Canada, who have limited or no credit history in the country. These cards can help you by establishing the financial track record you need. It can also help you rebuild your existing credit if you have missed payments in the past. In cases of insolvency or bankruptcy, secured credit cards may also be beneficial depending on your issuer’s eligibility requirements.
Newcomers to Canada can also qualify for unsecured credit cards through a specialized newcomer program. If this applies to you, it’s worth comparing the available options before you provide a deposit.
When might an unsecured credit card be better?
An unsecured credit card is more reasonable if you can qualify for the card without having to provide collateral. This option also allows you to keep the extra money available in your savings rather than tied up as a deposit. It also means your card’s limit is not directly determined by the amount of your collateral.
You may also want to consider an unsecured credit card if you are looking for specific features like no fees, low-interest rates, or rewards. Ultimately, the best choice depends on your financial situation rather than whether the credit card is secured or not.
What to compare before applying
Before you decide to submit an application for either a secured or unsecured credit card, review the terms of the card carefully. Look beyond whether the issuer requires a deposit. Also consider the following:
- Eligibility: Review the requirements including income, age, residency and credit score.
- Deposit: Check the minimum and maximum deposit amount. Look at where the issuer holds that money. Does the institution holding the funds have deposit insurance?
- Interest rate: Compare purchase and cash-advance interest rates. This is especially important if you might hold a balance on the card.
- Fees: Check annual, application, setup and foreign-transaction fees. Not every card includes these fees but be sure to examine the details of the card before applying.
- Credit-bureau reporting: Confirm whether the issuer reports activity to a credit bureau like Equifax, TransUnion or both.
- Refund rules: Find out when and how the deposit will be returned on a secured credit card.
- Upgrade options: Ask whether you can convert the card to an unsecured card down the line.
- Card network: Check where the card can be used. Not all businesses accept American Express, for example.
As you review the details of the card, do not hesitate to reach out to the issuer with questions. It is always best to have a complete understanding of how the card works before you sign up for it. This helps eliminate any unwanted surprises.
Takeaway
While unsecured and secured credit cards have different approval requirements, they work in similar ways once you start using them. A secured credit card may be the better option for those who have limited or damaged credit. An unsecured credit card usually offers additional features and doesn’t require collateral, but the qualification process is stricter. Neither option is necessarily right or wrong. Your best choice simply depends on what you can qualify for and what your financial goals are.
FAQs
Is a secured credit card the same as a prepaid card?
No, they are not the same. A prepaid card generally lets you spend funds that were loaded onto the card. A secured credit card will instead provide borrowed money up to a limit while requiring a separate deposit to help protect the issuer. With a secured card, you must still repay all your purchases.
Do you get your secured credit card deposit back?
Provided you repay the balance in full, you can usually get your deposit back from a secured credit card. To be sure, check the agreement before you sign up. It should outline any conditions including the refund schedule.
Does applying for a secured credit card affect your credit score?
It may. A credit card application can result in a hard inquiry, which appears on your credit report, which can lower your credit score.
Does a secured credit card guarantee approval?
No. A secured card does not guarantee approval. You will still need to meet the issuer’s requirements in order to have a successful credit card application.
Can a secured credit card help build credit?
Simply having a secured credit card won’t build credit on its own. For the account to positively impact your credit score, responsible spending will need to be reported to a credit bureau. To use your card responsibly, pay at least the minimum (and ideally the full balance) by every due date. This can help keep your balance low relative to your available limit.