But when you acquire a card, you need to choose between two broad categories—secured and unsecured credit cards.
In this post, we’ll carry out a comparison of secured vs unsecured credit cards to help you decide which is a better option.
What exactly do the terms “secured” and “unsecured” mean? How do the two types of cards differ? And which is better for your business? Let’s find out.
Secured vs unsecured: what does that mean?
When we use the term “credit card,” we usually refer to unsecured cards. When a bank or credit card company issues these cards, they don’t require the customer to provide any form of security.
What does the word “security” mean?
In the context of a credit card, it usually refers to a cash deposit.
So an unsecured credit card is a card that isn’t backed by a cash deposit. When you apply for a card of this type, the card issuer carries out a credit check. If your FICO score meets the issuer’s requirements and you satisfy the other conditions that have been laid down, your card will be approved.
A secured credit card is different. Typically it’s issued to individuals who have bad credit.
What’s bad credit?
This term is used in the context of people who regularly delay payments to creditors. An individual with bad credit could also be someone who has taken on excessive debt. This person would have a credit score that is less than 580 and would find it difficult to get an unsecured credit card.
Secured vs unsecured credit cards
If you compare secured vs unsecured credit cards, you’ll see that the main distinction between the two is that:
A secured credit card is issued to an individual with bad credit or someone who doesn’t have a credit history. If a secured credit card is used sensibly, it could help to rebuild the cardholder’s credit. Sensible usage implies never exceeding your credit limit and paying your credit card statement balance on time every month.
An unsecured credit card is issued to a person with good or excellent credit.
But these aren’t the only differences between the two categories of credit cards.
Secured vs unsecured credit cards: understanding the difference with an example
We mentioned that secured credit cards are issued on the condition that the card applicant makes a cash deposit with the card issuer. Let’s understand how this works with an example.
Let’s assume that Javier, who runs a small construction company, has bad credit. Three banks have turned down his credit card application. Now he’s told that he can get a secured credit card with a limit of $1,000. But he has to deposit $1,200 with the bank.
Wait a minute. If Javier needs to deposit $1,200 to get a credit limit of $1,000, wouldn’t it be simpler just to spend cash?
If he did that, he would manage to keep an extra $200 with himself.
What the bank’s asking him to do is deposit $1,200 in exchange for a credit limit of $1,000.
It doesn’t seem to make sense. However, there’s a crucial benefit that secured credit cards carry.
They help to build credit.
If Javier takes the offer and pays his credit card bills regularly, he could see a gradual improvement in his credit score. This could get him a higher credit limit and an unsecured credit card.
Secured vs unsecured credit cards: the differences
Here’s a table that highlights the main differences between secured vs unsecured credit cards:
Secured vs unsecured credit cards—what are the differences
|Secured credit cards||Unsecured credit cards|
|Who should apply for this type of card?||People with bad credit or those without a credit history||Individuals with good or excellent credit|
|Does security need to be provided?||Yes. Typically for an amount that is equal to or more than the credit card limit||No. The credit card limit is based on the individual’s credit score and the card issuer’s other rules|
|Why do people opt for the credit card?||Typically, to build credit. In many instances, people apply because their application for an unsecured credit card has been turned down||For convenience and to make purchases they can’t immediately afford. Also, for rewards points and cashback|
|What’s the credit limit like?||It’s usually equal to or less than the amount that is deposited with the bank||The credit limit is based on the cardholder’s credit score and credit history|
|What about the fees?||Cardholders could have to pay several types of fees. These could include annual fees, monthly charges, and an initial application fee||These cards carry a lower fee structure|
|Does the card issuer have a rewards program?||There are limited rewards||The rewards program is usually more generous|
|Is it easy to qualify for a card?||Yes. That’s because you have to make a deposit with the card issuer||It could be. It depends on your credit score|
|What’s the APR*?||The APR is usually high. It could be as high as 25% per year||APRs are lower. The average is in the range of about 17%|
|Does the credit card issuer report your details to the credit bureaus?||Some card issuers do. You need to check. If the card company does not report to the credit bureaus, you won’t be able to build your credit||Yes|
*APR stands for Annual Percentage Rate: This is the interest rate you pay to the card company for borrowing from them. However, if you pay your statement balance in full each month by the due date, you won’t have to pay this interest.
Secured vs unsecured credit cards: are they that much different?
When you’re comparing secured vs unsecured credit cards, you’ll see that in addition to their differences, they also have several similarities.
|Secured vs unsecured credit cards: Differences and similarities|
|Secured credit cards||Similarities||Unsecured credit cards|
Which card is right for you?
Which option should small business owners choose when they are deciding between secured vs unsecured credit cards?
If you have a good credit score, an unsecured card is the right choice. You’ll benefit from a higher credit limit and lower fees. Additionally, you’re likely to gain from a rewards program, as well.
But if you don’t qualify for an unsecured credit card, a secured card can be a good option. It can help you increase your credit score to a level that is high enough to allow you to become eligible for an unsecured card.
Do you want to know which are the best secured credit cards and unsecured cards that are available? We invite you to read our posts: