What Are the Differences Between an Unsecured and Secured Credit Card

Official blog of Refresh Financial

The Differences Between An Unsecured and Secured Credit Card

What is a secured credit card?

A secured credit card is different from other credit cards because you have to come up with a deposit  to secure your card. Usually, but not always, the amount of the deposit is equal to the limit you will be given on the card and no credit checks are conducted in order to obtain the card. If your credit isn't terrible, you may be asked to provide a deposit that is only a percentage of the limit on the card, however, credit card companies will have to run a credit check to determine if they can take that risk.

In short, a secured credit card is sort of like a credit card with extra abilities - your secured credit card holds the power to turn your poor credit into excellent credit and all you have to do is use it and keep it in great standing.

What is an unsecured credit card?

With an unsecured credit card, the credit is simply extended to you without security, as your credit score is good enough that you appear to be a low-risk borrower. People with a better credit score can bypass the security deposit step because they have, in the past, kept all their credit accounts in good standing.

What are the benefits of a secured credit card?

  • It is much easier to get approved for a secured credit card than it is for a regular credit card. Your collateral secures the credit card and lowers the risk the lender takes in lending to you. Just in case you default on the credit they’ve extended to you, they can use the funds you’ve used to secure your card to make up for your outstanding balance. These sorts of credit cards are designed specifically for those who have struggled with credit before, but who want to start fresh and build their credit score from the ground up, or those who have no credit history, such as new Canadians or young adults. If your credit score isn’t as high as you might like and has often prevented you from obtaining credit in the past, a secured credit card is definitely the way to go.
  • Your deposit may also be placed in a savings account by your lender, depending on who you go to, and can accrue interest over the period of time you have your credit card secured.
  • Secured credit cards are usually only secured for a specific amount of time and if, during that period, you keep your account in excellent standing, your lender may choose to unsecure your credit card (return your security deposit).

Can people tell by looking at your credit card that it’s a secured credit card?

When you use your secured credit card to pay for items in-store or online, there is no way for merchants to be able to tell your card is a secured credit card. To everyone else, including the credit bureaus, it just looks like a regular credit card.

Why do I have to pay interest to use my own money on a secured credit card?

When credit is extended, it comes with interest rates. It's an unavoidable fact of life. It's very unlikely that you will find someone willing to loan you money and not charge you any interest! Secured credit cards are no different. Yes, it's your money that is being used to secure the credit card, but it's not your money that you are spending - it's the lender's.

With a secured credit card, the lender is extending you credit - allowing your credit limit, balance and payment information to be reported to the major credit bureaus just like an unsecured credit card. With the extension of credit comes interest.   

Your money is locked up tightly somewhere, only to be touched in the event that a) you cancel the card, or b) you don't make your monthly payments (which you should avoid in any way you can!) in which case your credit card security deposit will be used to pay your balance and your account will not go into collections.  Be aware, however, that just like an unsecured credit card, late or nonexistent payments will be reported to the credit bureaus  and will likely pull down your credit score - plus your secured credit card could then be cancelled. Your deposit is security for the lender, not a resource to pull from if you can't make your monthly payments.

If you are adamant that you do not want to pay interest, you have two options:

  1. Pay off the balance on your secured credit card in full every month, therefore avoiding interest payments.
  2. Get a prepaid credit card. With these cards, your money is not being used to secure the card, you're actually spending your money. You load up the card, and shop away - the balance decreases with every transaction you make. When you've spent everything that's been prepaid, you have to reload the card. With a prepaid credit card, no credit is extended, therefore there are no interest payments, and a prepaid card will not have any impact on your credit score - positive or negative. Without credit being extended, there is nothing to report to the credit bureaus. Learn more about the differences between a secured credit card and a prepaid credit card. 

Where can I get a secured credit card?

Refresh Financial offers one of the best secured credit cards in the market, with low interest, low fees, and a security deposit as low as $200 (most secured credit card providers require at least $500). Apply quickly and easily online today!

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Not sure if a secured credit card or cash secured loan is right for you when it comes to building your credit score? Check out our handy graphic to help you decide:

Refresh Financial's secured savings loan can boost your credit score and put savings into your bank account.

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