Secured Vs. Unsecured Credit Card: Which one is better?

Secured Vs. Unsecured Credit Card

    When it comes to building or rebuilding your credit, choosing the right type of credit card is crucial. There are two main options: secured credit cards and unsecured credit cards. Both have their advantages and disadvantages, and understanding the differences between them can help you make an informed decision on which type of card to get.

    Understanding the Difference Between Secured and Unsecured Credit Cards

    When it comes to credit cards, there are two main types: secured and unsecured. While they may seem similar at first glance, there are some key differences between the two that you should be aware of before deciding which one is right for you.

    What is a Secured Credit Card?

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    A secured credit card is a type of credit card that requires a cash deposit to be made before the account can be opened. The deposit serves as collateral for the credit limit on the card. For example, if you deposit $500, your credit limit will typically be $500 or slightly more.

    Secured credit cards are designed for individuals who have limited or poor credit histories and are looking to build or rebuild their credit. By using a secured credit card responsibly, you can demonstrate to lenders that you are capable of managing credit, which can help improve your credit score over time.

    It’s important to note that while secured credit cards can be a great tool for building credit, they do have some limitations. For example, the credit limit on a secured credit card is typically lower than that of an unsecured credit card, and you may be required to pay an annual fee or other fees associated with the card. 

    What is an Unsecured Credit Card?

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    Unsecured credit cards are primarily targeted toward individuals with stronger credit profiles. These cards do not necessitate a cash deposit and extend a line of credit based on one’s creditworthiness—which takes into consideration factors such as credit history, income, and credit score. Unsecured credit cards typically offer higher credit limits and perks such as cashback and travel rewards.

    However, there also exists a specific category of unsecured credit cards—guaranteed approval credit cards—that are designed for individuals striving to rebuild their credit. Comparable to secured credit cards in their purpose, these cards are accessible even to those with less-than-perfect credit scores. These guaranteed approval cards often come with initial low limits, typically around $300. However, these limits can be higher and may increase over time, contingent upon the cardholder’s credit score and history of responsible usage.

    It’s important to note that guaranteed approval credit cards can come with higher fees and interest rates, especially for individuals with lower credit scores. And similarly to unsecured credit cards, late or missed payments can lead to a negative impact on your credit score, affecting your ability to qualify for credit in the future.

    Pros and Cons of Secured Credit Cards

    Secured credit cards are a popular option for those who are new to credit or have poor credit scores. They offer several advantages and disadvantages that you should consider before applying for one.

    Advantages of Secured Credit Cards

    • Opportunity to build credit: Secured credit cards can be a great option for those who are new to credit or have poor credit scores. By making timely payments on the card, you can build a positive credit history, which can help you qualify for more favourable credit terms in the future.
    • Flexibility: Secured credit cards can be used to make purchases just like unsecured credit cards, both online and in stores. You’ll be able to enjoy the convenience of credit card use, as well as the added security that comes with using a credit card instead of cash or a debit card.
    • No hard credit check required: Since you do not need to have a good credit score to get approved for a secured credit card, most institutions in Canada will not need to perform a hard credit check when they receive your application. This means that your credit score will not be negatively impacted by a hard credit check. As long as you have the funds for your deposit, you should run into no problems!

    Disadvantages of Secured Credit Cards

    • Deposit required: You’ll need to make a cash deposit in order to get a secured credit card. This deposit will typically be equal to the credit limit on the card. While this can be a good thing if you’re trying to control your spending, it can also be a disadvantage if you don’t have the cash available to make the deposit.
    • Little to no rewards or benefits: Most secured credit cards do not offer rewards or benefits such as cashback, travel rewards, or points that can be redeemed for merchandise or gift cards. And even those that do offer rewards, such as Neo Secured card, are not as generous as what one could get with a typical rewards credit card.
    • No upgrade path: While secured credit cards can be a great way to build credit, they typically do not offer an upgrade path to an unsecured credit card. This means that you’ll need to apply for a new credit card once you’ve built up your credit score, which can be a hassle.

    In short, secured credit cards can be a great option for those who are new to credit or have a poor credit score. They offer the opportunity to build credit and have flexibility in spending. 

    However, they also require a deposit, may come with higher fees and interest rates, and typically do not offer competitive rewards or benefits. As such, be sure to weigh the pros and cons carefully before applying for a secured credit card.

    Pros and Cons of Unsecured Credit Cards

    Advantages of Unsecured Credit Cards

    • No deposit required: Unlike secured credit cards, unsecured credit cards do not require a cash deposit to be made before the account can be opened.
    • Rewards and benefits: Many unsecured credit cards offer rewards and benefits such as cashback, travel rewards, and points that can be redeemed for merchandise or gift cards. 
    • Potential for credit limit increase: If you consistently use your unsecured credit card responsibly by making timely payments and maintaining a low credit utilization rate, there’s a good chance your credit limit will increase over time. This can further enhance your credit score and provide more financial flexibility. 

    Disadvantages of Unsecured Credit Cards

    • Higher credit score requirements: With the exception of guaranteed approval credit cards, unsecured credit cards generally require a good credit score and a proven track record of making payments on time. If you have limited credit or a poor credit score, you may not qualify for a typical unsecured credit card and have your application rejected. 
    • Risk of overspending: Without a deposit to serve as collateral, it can be easy to overspend on an unsecured credit card and accumulate high levels of debt. That’s why budgeting is an incredibly important part of managing credit. 
    • Smaller credit limits for lower credit scores: For those with lower credit scores, the credit limit offered by financial institutions may be smaller. In contrast, with a secured credit card, your credit limit can be as high as your cash deposit. Although the limit of an unsecured credit card can increase over time with responsible usage, it does initially limit your spending flexibility.

    Factors to Consider When Choosing a Credit Card

    Your Credit Score and History

    Your credit score and credit history will play a key role in determining what type of credit card you can qualify for. If you have a limited or poor credit history, a secured credit card may be the best option to build credit. If you have a good credit score and a proven track record of making payments on time, an unsecured credit card may be a better fit. Typically, the better your credit score, the better credit cards you can qualify for, such as cards with great rewards, insurance, or discount perks. 

    Annual Fees and Interest Rates

    Be sure to read the terms and conditions carefully before applying for a credit card to understand what fees and interest rates apply. Some credit cards may come with an annual fee, while others may have higher interest rates than others. 

    Look for a credit card that offers reasonable fees and interest rates that you can afford. Additionally, make sure to weigh out how much value you’ll be getting out of the card’s reward program (minus the interest payments you predict you’ll be making) and the card’s annual fee. If you think you’ll end up paying more in fees than you’ll get back in rewards, consider choosing a less expensive card. 

    Rewards and Benefits

    If you’re looking for a credit card that offers rewards and benefits such as cash back, travel rewards, or points that can be redeemed for merchandise or gift cards, an unsecured credit card may be a better option. Be sure to compare the rewards and benefits offered by different credit cards to find one that fits your needs and spending habits.

    Credit Limit and Deposit Requirements

    If you need a higher credit limit than what a secured credit card can offer, an unsecured credit card may be a better fit. Keep in mind that unsecured credit cards may require a higher credit score to qualify, and you’ll need to be able to manage your credit responsibly to avoid overspending and accumulating high levels of debt.

    How to Improve Your Credit Score for Better Card Options

    Making Timely Payments

    One of the most important factors in building your credit score is making timely payments on your credit cards and other debts. Be sure to make at least the minimum payment on your credit cards each month, and consider setting up automatic payments to ensure that you never miss a payment.

    Reducing Credit Utilization

    Your credit utilization is the amount of available credit you’re using, expressed as a percentage. To improve your credit score, aim to keep your credit utilization below 30% on each of your credit cards. For example, if you have a credit limit of $1,000, try to keep your balance below $300. The closer you get to your available credit limit, the lower your credit score can get. 

    Monitoring Your Credit Report

    Regularly monitoring your credit report can help you identify and correct errors or fraudulent activity that could be impacting your credit score. You are entitled to receive a free credit report from each of the major credit bureaus (TransUnion and Equifax) annually. Additionally, many digital platforms and financial institutions provide the convenience of free credit score tracking

    Secure Credit Card vs Unsecured: The Bottom Line

    Choosing between a secured credit card and an unsecured credit card depends on your credit score and financial needs. Secured credit cards can be a great option for those who are new to credit or have a poor credit score, while unsecured credit cards can offer higher credit limits, rewards, and benefits.

    Regardless of which type of credit card you choose, be sure to use it responsibly, make timely payments, and monitor your credit report regularly to build and maintain good credit. With the right credit habits, you can improve your credit score and qualify for even better credit card options in the future.

    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications