Key Takeaways
- Secured credit cards require a cash deposit that acts as “collateral” on your card balance, and are easier to obtain for people with lower credit scores
- Unsecured credit cards do not require that initial cash deposit, but are more difficult to obtain, have higher credit limits, and offer better rewards programs on money spent
- If you have a limited or poor credit history and do not qualify for an unsecured credit card, a secured credit card is a good starting point to build credit
- Credit cards are strategic credit-building tools that can play a large role in your business’s overall growth
What is the difference between secured and unsecured credit cards?
An unsecured credit card is what most people commonly think of when discussing “credit cards.”
This is a credit card that has a credit limit set by the issuing bank based on your credit history. You use this card to make payments, then pay off the balance at the end of the month.
A secured credit card is only slightly different in that it requires an initial cash deposit to act as collateral in the event that you do not pay off your credit card balance.
Let’s say you open a secured credit card and make a cash deposit of $3,000. That deposit acts as the credit limit on that card, meaning you can only spend up to $3,000 on that card before paying off the balance.
Every time you pay off the balance on that card, you pay it from the cash in your checking account, as you would with an unsecured credit card.
However, if you were to neglect to pay off your secured credit card by the time the balance is due, your bank would seize that initial $3,000 cash deposit in order to cover the amount you owe.
This is a credit card that has a credit limit set by the issuing bank based on your credit history. You use this card to make payments, then pay off the balance at the end of the month.
A secured credit card is only slightly different in that it requires an initial cash deposit to act as collateral in the event that you do not pay off your credit card balance.
Let’s say you open a secured credit card and make a cash deposit of $3,000. That deposit acts as the credit limit on that card, meaning you can only spend up to $3,000 on that card before paying off the balance.
Every time you pay off the balance on that card, you pay it from the cash in your checking account, as you would with an unsecured credit card.
However, if you were to neglect to pay off your secured credit card by the time the balance is due, your bank would seize that initial $3,000 cash deposit in order to cover the amount you owe.
What are the pros and cons of secured and unsecured credit cards?
Unsecured Credit Cards | Secured Credit Cards | |
|---|---|---|
Pros | Higher credit limit, better rewards systems | Easier to obtain, prevent overspending |
Cons | More difficult to obtain,
higher interest rates | Lack the robust rewards systems of unsecured credit cards, lower credit limits, require up-front cash deposit |
Which credit card is right for you?
Ultimately, the credit card that’s best for you comes down to your own assessment of your credit history, finances, and purpose for the card.
If you are looking to build and improve your credit score, a secured card may be a smart, strategic starting point. This is a card you can easily obtain and use almost as if it’s a credit-building debit card.
If your credit is sufficient to obtain an unsecured card but you prefer the safe backing of an initial cash deposit and low credit limit, a secured card may be a smart financial move.
However, if you have a credit history that qualifies you for an unsecured card and you are not concerned about your potential for overspending, an unsecured credit card is ultimately the better choice. This card comes with better rewards, higher credit limits, and does not require cash collateral.
If you are looking to build and improve your credit score, a secured card may be a smart, strategic starting point. This is a card you can easily obtain and use almost as if it’s a credit-building debit card.
If your credit is sufficient to obtain an unsecured card but you prefer the safe backing of an initial cash deposit and low credit limit, a secured card may be a smart financial move.
However, if you have a credit history that qualifies you for an unsecured card and you are not concerned about your potential for overspending, an unsecured credit card is ultimately the better choice. This card comes with better rewards, higher credit limits, and does not require cash collateral.
Transition from a secured to an unsecured credit card
If you are a small business owner just starting out looking to build credit, or you’re in the process of improving poor credit, establishing a credit-building strategy that incorporates a credit card plan is a smart way to start.
Consider obtaining a secured credit card initially, even if you only have $1,000 to back it. Use this card to cover basic daily expenses, continuously pay off the balance on time, and allow it to steadily increase your credit score.
Depending on your initial credit standing, you could see a substantial improvement to your credit score in anywhere from 6-12 months, enabling you to then transition to an unsecured card.
Consider obtaining a secured credit card initially, even if you only have $1,000 to back it. Use this card to cover basic daily expenses, continuously pay off the balance on time, and allow it to steadily increase your credit score.
Depending on your initial credit standing, you could see a substantial improvement to your credit score in anywhere from 6-12 months, enabling you to then transition to an unsecured card.
Why are credit cards important financial tools?
Your credit rules your finances.
Good credit plays a critical role in your business’s growth and opportunities, including the space you operate your business in, earning rewards on business expenses, and qualifying for future small business funding.
Credit cards are an easy way to build your credit by simply spending the money you need to spend anyway.
Good credit plays a critical role in your business’s growth and opportunities, including the space you operate your business in, earning rewards on business expenses, and qualifying for future small business funding.
Credit cards are an easy way to build your credit by simply spending the money you need to spend anyway.
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