Is a Secured Card or Unsecured Card Better for My Credit?

Is a Secured Card or Unsecured Card Better for My Credit? article image.

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While secured credit cards are a popular option for building or rebuilding credit, they aren't necessarily better or worse for your credit than unsecured cards. In fact, the type of card, the card's fees, the interest rate and whether it's secured don't have any impact on your credit scores. It all depends on how you use the card and your overall credit profile.

The Difference Between a Secured and an Unsecured Card

The main difference between secured and unsecured credit cards is that secured cards require you to send the card issuer a refundable deposit when you open your account. Generally, your deposit determines your card's credit limit, and many secured cards have minimum and maximum security deposit limits of around $200 to $3,000 (though a few offer lower deposit requirements depending on your credit).

Because the deposit removes some of the risk of loss to card issuers, it's often easier to get a secured credit card. But aside from the security deposit, there's no difference in how secured and unsecured cards work. You can use both types of cards to make purchases and either pay off the balance in full each month (to avoid interest) or pay down the balance over time. With both you also need to make at least the minimum monthly payment to avoid late fees and hurting your credit—your card issuer won't take your minimum payment out of your deposit if you have a secured card.

If you miss too many consecutive payments, the card issuer may close your account and send your account to collections. With a secured card, the issuer can also keep your security deposit to offset what you owe.

Functionality aside, you may find that secured cards and unsecured cards that don't require good credit have less favorable terms than other credit cards. Many have annual fees, and some charge credit limit increase, monthly maintenance and application fees. You also won't find many rewards cards that don't require you to have at least fair credit.

How Can Credit Cards Help Your Credit?

Credit scoring models don't care whether you have a secured or unsecured card—and either type of card can impact your credit in several ways. A credit card can help your credit scores because:

  • You can add positive payments to your credit history. Making your monthly payments on time is one of the best things you can do for your credit scores. A long history of on-time payments can be a key to having excellent scores.
  • It increases your available credit. Credit scoring models compare your card balances and credit card limits to determine your credit utilization rate. Only using a small portion of your card limits can be good for your scores, which may be easier when you have more available credit.
  • It may "thicken" your credit file. Having no credit accounts can make you unscorable, and only having a few accounts may result in a thin file. A new credit card can help you establish credit, or show you can manage multiple accounts.
  • It can improve your credit mix. Having experience with both loans and credit cards can help your credit scores. If you don't already have a credit card, opening a new card may add to your credit mix and help your scores.

If you want to use your card to build credit, making one small purchase each month and then paying the bill in full could be a good approach.

How a Credit Card Could Hurt Your Credit

Opening and using a new credit card can also hurt your credit scores if:

  • Your payments are late. Missing a payment can hurt your credit scores, and missing several payments in a row or having your account sent to collections can lead to even larger score drops.
  • You have a high balance. If you use a large portion of your credit card's limit (such as over 30%), the high utilization ratio could hurt your credit scores. Keep in mind that in addition to purchases, any annual or other fees your card issuer charges will contribute to your utilization ratio.
  • Applying leads to an inquiry. Each credit card application can lead to a hard credit check. These can hurt your credit scores by a few points, but they are a usually minor scoring factor.
  • Opening a card lowers your average age of accounts. Opening a new account can also lower the average age of your accounts. It's another minor scoring factor, but can still lead to a score drop.

A credit card can also indirectly hurt your credit if you have to choose between making your credit card payment and other bills. It's especially important to review the card's fees to understand your minimum payment and due date. And try to avoid carrying a balance on a high-interest credit card.

How to Choose Between a Secured and Unsecured Card

While you'll have fewer options, you may qualify for a variety of secured cards and a few unsecured credit cards if you're new to credit or have bad credit. When choosing between the two types of cards, consider:

  • The security deposit: If you can't spare any money for a security deposit, a secured card probably won't be a viable option.
  • Fees: Secured and unsecured cards can charge a variety of fees. Look out for annual and monthly fees, as you have to pay these regardless of how you use the card. Also, look for fees for foreign transactions, cash advances, late payments and replacement cards.
  • Rewards: A few cards that don't require good credit offer rewards on purchases. One of these could be a good option if you plan on regularly using the card.
  • Potential upgrades: Some card issuers will periodically review your credit card account and may offer to increase your credit limit or refund your security deposit and transition you to an unsecured card based on responsible use.

The best secured cards tend to be those that don't charge an annual fee and offer cash back rewards. Although you have to send a refundable security deposit, it could still be a better option than paying a non-refundable annual fee for an unsecured card. Certain issuers will also review your account after eight months and may transition you to an unsecured card.

You can also try for an unsecured card. Some new cards let you link your bank account and use cash-flow underwriting (i.e., they look at your bank transactions in addition to or instead of your credit) to approve new cardholders.

Get Matched With Your Next Card

If you're unsure of which card to get, a side-by-side comparison can help. You can use Experian CreditMatchTM to compare cards from our partners. After logging in, you can also get matched with cards—which can help you determine which cards you may qualify for based on your credit profile. You can also use an Experian account to monitor your credit. If you can use your new card to improve your credit scores, you may be able to qualify for better cards in the future.