Credit cards are powerful financial tools, helping people build credit and offering a convenient way to pay for both everyday and emergency purchases. But if you have a low credit score or are new to credit, you might find it difficult to be approved for a credit card. You also might be weighing your options between a secured or unsecured card.

Let’s look at the differences between secured and unsecured credit cards – from qualification requirements to credit impact – so you can make an informed choice that’s good for your overall financial health.

What’s a Secured Credit Card?

A secured credit card requires you to pay a refundable security deposit to open an account. This deposit, which is usually equal to your credit limit, serves as collateral for the credit card issuer. Secured cards are designed for consumers with bad credit or no credit history who want to build up their credit over time. A secured credit card account functions much like a traditional credit card, with its main distinction being the cash deposit required upfront.

What’s an Unsecured Credit Card?

Unsecured credit cards work a little differently from secured cards. Most importantly, they don’t require any collateral or security deposit. Instead, the credit card companies base your approval on their review of your credit history, which includes both your credit report and your credit scores.

Many types of unsecured credit cards are available, and some may offer rewards programs, such as the ability to earn cash or points on other purchases. If you have an established credit history, you may qualify for an unsecured credit card with a higher credit limit and fewer fees.

While unsecured credit cards have historically been more difficult for users with no or low credit history to obtain, today’s credit card options include unsecured cards designed specifically to help users build up their credit history – the Juzt Digital Credit Card is a good example of such an option.

Differences Between Secured and Unsecured Credit Cards

So, what is the difference between secured and unsecured credit cards? While both types of credit cards allow you to make combined purchases, earn rewards, and build credit, they operate differently. Here's a deeper look into the main difference between secured and unsecured credit cards.

Collateral Requirement

The most significant difference between secured and unsecured credit cards is the collateral requirement.

  • Secured credit cards: Secured credit cards require you to pay a refundable security deposit, often starting around $200, to open your account. Your credit limit is generally equal to the amount of the deposit, which means if you deposit $300, your credit limit will also be $300.This deposit serves as collateral and is used by the credit card issuer if you default on your payments. While your credit limit is usually equal to the amount of your security deposit, some credit card issuers may increase your limit after you show responsible use over time. Your security deposit minimizes the lender's risk, making it easier for users with a low credit score or limited credit history to be approved. This card functions like a prepaid card.
  • Unsecured credit cards: With unsecured credit cards, you don’t pay any type of deposit or offer any collateral. Instead, these cards are based on your creditworthiness, meaning the credit card companies look at your credit scores, income and overall financial health. As a result, unsecured cards may offer a higher credit limit than secured cards.

Risk and Security

In an era of widespread digital transactions, protecting your personal and financial data is perhaps more critical than ever. Both secured and unsecured credit cards provide security measures to protect your information, but the risks they pose – especially in the event of a data breach – can be quite different. Here’s a closer look at how each type of card addresses security concerns and what that means for you as a cardholder.

  • Secured credit cards: Secured credit cards often come with advanced security features to protect your personal information and financial data. Many card issuers offer features like EMV chip technology, which gives you an extra layer of security by generating a unique code for each transaction. This practice makes it harder for bad actors to replicate your card. In addition, secured card issuers may offer real-time alerts for transactions, which allow you to monitor your spending and immediately flag any unauthorized activity. While the cash deposit you pay for a secured credit card serves as collateral, it also acts as a protective buffer for you as the cardholder. In the event of fraudulent activity, you can feel somewhat more secure knowing that your financial exposure is limited to your cash deposit. But – it's important to stay vigilant about promptly reporting any suspicious transactions since your deposit may be affected if fraudulent charges go unreported.
  • Unsecured credit cards: Unsecured credit cards, while offering more flexibility and purchase power, come with their own set of risks regarding data breaches. Since there’s no collateral backing your card, your potential financial loss can be greater if fraud occurs. However, many unsecured credit card issuers prioritize security by implementing strong encryption technologies and fraud detection systems to safeguard your information. For example, the Juzt Digital Credit Card helps protect you by offering in-app and in-account the ability to block your card with a few simple clicks if you suspect fraudulent transactions. Juzt also allows you to set up alerts that help guard the integrity of your transactions. In addition, most unsecured credit card companies offer zero-liability policies, which means you aren’t held responsible for any unauthorized charges made with your card – if you promptly report them. You’ll usually see a statement credit for any fraudulent purchase, which greatly reduces the financial impact of identity theft and provides you some peace of mind when using your unsecured card.

Credit Limit Determination

How credit limits are set is another important difference between secured and unsecured credit cards. Here’s more:

  • Secured credit cards: Your credit limit is directly tied to the cash deposit you make when opening the account. For instance, if you deposit $500, that will probably also be your credit limit. However, as you make on-time payments and responsibly manage your account, some of the best secured credit cards may offer a higher credit line or allow you to increase your deposit. This ability to increase your credit limit can be a great benefit – it not only gives you more spending power, but it also can help boost your credit score. Just keep in mind that your initial credit limit will likely be lower than that of many unsecured cards, which can limit your purchasing power – at least in the beginning.
  • Unsecured credit cards: Credit limits on unsecured cards are generally based on your credit score, income and overall financial profile. The credit card issuer may offer higher limits to applicants with a strong credit history, while those with lower scores might receive a lower credit limit.

Qualification Criteria

The qualification criteria for secured and unsecured cards differ based on the applicant's creditworthiness. Here’s how:

  • Secured credit cards: Secured cards tend to be easier to qualify for, especially for consumers with bad credit or no credit history at all. Since a secured credit card requires a deposit, credit card companies view this option as less risky. If you're just starting out or looking to rebuild credit, secured cards may be a good option.
  • Unsecured credit cards: Unsecured cards usually require applicants to pass a credit check and have a well-established credit history with a variety of credit accounts. A low credit score may make it difficult to qualify for an unsecured card, or you may be offered a card with high annual fees and a low credit limit. It’s important to note that gaining approval for an unsecured credit card can be more challenging for applicants with a low credit score or poor credit since issuers tend to want a robust financial profile. One exception to this is the Juzt Digital Credit Card, which is an unsecured card specifically designed to help users with low or no credit history build their credit scores.

Credit Score Impact

Both secured and unsecured cards can help improve your credit scores, but understanding how each type of card impacts your credit means also understanding your credit use habits and payment behavior. Here’s a closer look.

  • Secured credit cards: Secured credit cards work much like unsecured cards when it comes to credit reporting. The three major credit bureaus – Equifax, Experian and TransUnion – regularly receive information on your monthly payments, credit utilization and account activity. Making your minimum payment and paying your bill on time helps build a positive credit history. Over time, this can make you more eligible for unsecured cards since you may have a higher credit score.
  • Unsecured credit cards: Unsecured credit cards also report to the three major credit bureaus. Your responsible use, including making on-time payments and keeping your balance below the credit limit, can improve your score. However, carrying a high balance or missing payments can negatively impact your credit utilization and your overall credit score. A little caution is necessary with unsecured cards. If you carry a high balance relative to your credit limit, it can hurt your credit utilization ratio, which is an important factor in your credit score. In fact, if your balance is regularly above 30 percent of your available credit, it might raise some red flags for lenders. And don’t forget how important it is to make your payments on time ­– missing a payment can lead to late fees, plus a dip in your credit score, since payment history is a powerful factor in calculating your credit score.

Whether you're opting for a secured or unsecured card, understanding their differences helps you make informed decisions and improve your personal finance journey. You have many options for both secured and unsecured cards, so you’ll need to review them to decide which best meets your financial situation and needs. No matter which option you choose, remember that consistent on-time payments, keeping a low balance, and managing your credit wisely will help you achieve financial health over the long term.

This article provides general information and does not constitute financial advice. For guidance specific to your situation, consider consulting a financial advisor or credit counselor.