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Secured vs. Unsecured Credit Cards: Everything You Need to Know

Having a good credit score opens many doors in your life. For example, a good credit score can be crucial for getting a car loan or home mortgage with a low interest rate. Unfortunately, more than a quarter of Americans currently have bad credit, according to Experian.

A poor or fair credit score can do more than raise interest rates on large loans (or bar you from getting one). In some cases, they can also stop you from being able to rent a home or gain employment (particularly in the government sector). 

Raising your credit score can feel challenging, but it’s absolutely possible. On the other hand, maintaining a good or excellent credit score can feel like you're walking on a tightrope—one false move, and your score drops. Thankfully, responsible use of credit cards can help in either of these situations. 

If you're looking for a credit card to help with your unique credit needs, you may have come across the terms "secured" and "unsecured." Keep reading to learn the difference between secured and unsecured credit cards, so you can determine which option is best for you. 

What are secured credit cards?

Secured credit cards look and function like unsecured options, but they're initially backed by a deposit from you. The cash deposit made when the card is opened acts as collateral that reduces your lender's risk. If you default on your secured credit card balance, the lender can take the original cash deposit and deduct that from the amount you owe. 

How do secured credit cards work?

Most of the time, the cash deposit used to open a secured credit card will be equal to the requested credit card balance. For example, if you deposit $250, your available credit will be $250.

Although it's rare, some companies use a sliding scale that allows those with slightly higher credit to put a percentage of the balance down. If you qualify for a lower cash deposit, you'll be told in advance the percentage you have to pay and the maximum balance you're allowed to open. 

Eventually, many secured credit cards can be upgraded. With responsible use over time, the lender may offer you small balance increases without requiring additional cash deposits. You may also be able to upgrade to an unsecured credit card and have your cash deposit refunded after long-term responsible use. 

How long will it take to raise my credit score with a secured card? 

With responsible usage, a secured credit card can start raising your score within 6 months. For the most improvement (and the fastest), make all your payments on time and aim to keep your usage under 30% of your maximum available credit.

How do you close a secured credit card?

To close a secured credit card:

  • Pay off any remaining balance.

  • Call the phone number on the back of your secured credit card.

  • Tell a representative you want to close your card and let them walk you through the steps.

  • Before hanging up, verify how much money you'll be getting back from the cash deposit and how long it will take to receive those funds.

  • Follow up as necessary.

Can anyone get a secured credit card?

Secured credit cards can be much easier to get than traditional unsecured options. However, that doesn't mean everyone will necessarily qualify. Each secured credit card company has its own requirements, so you should research before applying. 

What are unsecured credit cards?

What does "unsecured" credit card mean? It means you don't have to place any collateral against the balance you're given. Instead, the lender will grant you a balance based on your credit score, history, employment, and other factors. Most people think of an unsecured credit card when they hear the term "credit card."

With an unsecured credit card, you'll sign a contract outlining your available balance, monthly minimum payments (usually based on a percentage), interest rate, and due date. You'll be expected to pay your balance on or before the due date.

You may not accrue interest if you pay in full before the due date. However, any balance that remains when your credit card payment is due will be subject to interest based on the terms of your lending agreement. 

How can you improve your credit using unsecured credit cards?

One of the best ways to improve your credit rating with an unsecured credit card is to make all your monthly payments on time. If possible, try to pay your balance in full on or before the payment is due. If that's not possible, you'll want to ensure you make at least the monthly minimum payment when it's due.

Doing this can show future lenders that you're reliable, which makes you a low-risk borrower. Low-risk borrowers are usually more likely to qualify for larger loans and better interest rates. 

Who is eligible to get an unsecured credit card?

Eligibility for unsecured credit cards will vary by lender. Certain factors such as your credit score may not only influence whether you're eligible for an unsecured credit card, but it may also affect the amount you're approved for. Most unsecured credit cards will require the following:

  • A good or excellent credit score

  • A history of making on-time payments

  • Several years of history on your credit report

  • A reliable source of income (you'll generally need to show proof of income for the past 1 to 2 years)

Secured vs. unsecured credit card: What's the difference?

You may be surprised to learn that secured and unsecured cards are more alike than different. Many credit card companies offer both types of cards, although a few companies focus solely on one kind or the other. 

Secured and unsecured credit cards have the following in common:

  • Both options can help build (or repair) your credit score and history.

  • Both are used in the same way, including in-person and online payment options.

  • You receive a monthly statement detailing your account activity and the minimum required payment.

  • Both can accrue interest on any balances carried over from the previous month.

The primary differences between these two credit card options are the initial cash deposit and the necessary qualifications to obtain them. While secured credit cards require an initial cash deposit they can use as collateral against your spending limit, unsecured credit cards don't. Unsecured credit cards may also be more challenging to obtain because they usually require good credit and a more extensive credit report history. 

You may wonder whether a secured or unsecured credit card is the best option for your needs. However, there isn't a one-size-fits-all answer, as each credit card type comes with its distinct set of benefits and downsides. 

Benefits and downsides of secured credit cards

The primary benefits of using a secured credit card can include:

  • You can have a significantly higher chance of approval, even if you have bad credit (or no credit history).

  • They can help you build your credit history and raise your score without going into debt.

  • After a set amount of time, you'll usually receive your initial cash deposit back (as long as you didn't default on any payments).

The primary downsides of using a secured credit card can include:

  • Secured credit cards tend to have higher interest rates.

  • Fees on secured credit cards can be often higher than on alternatives.

  • Secured credit cards don't usually offer extra perks, benefits, or rewards programs.

Benefits and downsides of unsecured credit cards

The main benefits you can expect from using an unsecured credit card can include:

  • You aren't required to make a cash deposit to open your card.

  • The fees and interest rates are generally lower versus secured card options.

  • You may be offered perks, benefits, or rewards for using your card.

The main downsides you can expect from an unsecured credit card include:

  • It may be more difficult to qualify for an unsecured credit card.

  • The interest rates, fees, benefits, and other agreement terms are based on your credit score and history.

  • A higher credit limit could tempt some people to spend beyond their means. 

Tips for using credit cards

Before you begin using an unsecured or secured credit card, it's crucial to understand what "responsible use" really means. Improper use of any credit card can cause further damage to your credit score and history, which could make it even harder to become financially healthy. To help further your understanding, we've compiled a list of tips for using any type of credit card. 

  • Keep your balance low: Stay under 30% of your total credit limit to keep your utilization ratio as low as possible. Your utilization ratio is an important aspect of your credit history that can affect your score. One way to do this (and help you keep track of your budget) is to use your credit card for one specific spending need and immediately pay off what you spent. For example, you could use your credit card specifically for gas, groceries, or even your daily coffee. Remember to only use your credit card for your needs, not your wants. 

  • Make your payments: You should try to pay your balance off in full each month. If this isn't possible, you should always make at least your minimum monthly payment and never miss a payment. Late or missed payments can have a significant impact on your credit score. 

  • Be smart about your credit: Always read your credit card agreement in full before your first use, so you aren't blindsided later. You'll also want to read your monthly statements carefully to ensure accuracy—which is also a great way to help identify credit fraud or identity theft early. You'll also want to monitor your credit score regularly and report a lost or stolen card immediately. 

  • Be proactive: Most credit cards offer balance alerts, which send a text when you spend money, letting you know how much was spent and how much you have left. This can help you better budget your spending, so you don't accidentally overspend. In addition, if your credit card company offers spending analysis tools or other useful features, it may be a good idea to use them. 

Build or repair your credit with the Varo Believe Secured Credit Card

If you're looking to build or repair your credit,  the Varo Believe Card, can be an affordable credit-building option.1 You can set your credit limit based on the initial cash deposit, and you don't need a good credit score to apply. Responsible use of the Varo Believe Card can help you raise your credit score while also saving money on interest and fees, so you can invest more in your financial future.

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