Credit cards can be a boon for small business owners. They offer convenience, the ability to pay for your purchases later, and additional benefits like rewards points and cashback. 

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.

Keep reading: Best Business Credit Cards 

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

*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.

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:

Best Secured Credit Cards

Best Unsecured Credit Cards