Secured and unsecured credit cards are two types of credit cards that are designed for different types of borrowers. A secured credit card is a credit card that is backed by a deposit that the borrower makes with the issuer. This deposit acts as collateral for the credit card and is intended to protect the issuer from the risk of default. An unsecured credit card, on the other hand, is not backed by a deposit and is extended to the borrower based on their creditworthiness. Unsecured credit cards are generally considered to be more prestigious and offer more favourable terms, such as lower interest rates and higher credit limits, than secured credit cards.
Features of secured credit cards:
- Low credit score requirements: Secured credit cards are often more accessible to people with poor or limited credit history, as the security deposit reduces the risk for the credit card issuer.
- Opportunity to build or repair credit: By using a secured credit card responsibly and paying your bills on time, you can improve your credit score and demonstrate your creditworthiness to other lenders.
- No annual fees or high-interest rates: Some secured credit cards have no annual fees and offer competitive interest rates, making them a more affordable option compared to unsecured credit cards that may have higher fees and rates.
Features of unsecured credit cards:
- No security deposit required: Unlike secured credit cards, unsecured credit cards do not require a security deposit upfront. This can make them more accessible to people with good credit who do not want to tie up a large amount of money in a security deposit.
- Credit limit based on creditworthiness: The credit limit on an unsecured credit card is typically based on the creditworthiness of the cardholder. People with good credit may be approved for a higher credit limit than those with poor credit.
- Annual fees: Some unsecured credit cards charge an annual fee to cover the cost of maintaining the account.
The difference between secured credit cards and unsecured credit cards in as below:
| Feature | Secured Credit Card | Unsecured Credit Card |
| Definition | A credit card that requires a security deposit to be placed on the account | A credit card that does not require a security deposit to be placed on the account |
| Credit Limit | The credit limit is usually equal to the amount of the security deposit | The credit limit can vary and is determined by the creditworthiness of the borrower |
| Approval Process | May be easier to get approved for, especially for those with poor credit or no credit history | May be more difficult to get approved for, especially for those with poor credit or no credit history |
| Interest Rates | May have higher interest rates than unsecured credit cards | May have lower interest rates than secured credit cards |
| Rewards | May have fewer rewards or less generous rewards than unsecured credit cards | May have more rewards or more generous rewards than secured credit cards |
Bottom line:
The main difference between secured and unsecured credit cards is the way in which they are issued and the level of risk that the issuer is taking on. Secured credit cards require a deposit from the borrower, which acts as collateral and protects the issuer from the risk of default. Unsecured credit cards do not require a deposit and are extended to the borrower based on their creditworthiness. As a result, unsecured credit cards generally offer more favourable terms, such as lower interest rates and higher credit limits, than secured credit cards. Ultimately, the choice between a secured and unsecured credit card will depend on the borrower’s credit history and their ability to qualify for an unsecured credit card.