What’s different between secured and unsecured credit cards?

At first glance, it might be hard to tell the difference between secured and unsecured credit cards. Not only do they usually look the same, they also work in many of the same ways. But a key difference sets these cards apart. Secured credit cards require the account holder to make an upfront cash deposit, which protects the card issuer. 

Take a look at secured vs. unsecured credit cards to see which might be a good fit for you.

A secured credit card is a type of credit card that requires a security deposit to open the account. Once you make that cash deposit, you can charge purchases anywhere credit cards are accepted. You can swipe, insert or tap them just like a traditional unsecured card.

While terms vary with each card, the security deposit typically becomes your credit limit. This protects the card issuer. So if you’re unable to make your payments, the issuer can keep your original deposit.

While temporarily parting with cash for a secured credit card may seem less than ideal, it could help you establish, build or rebuild credit when used responsibly. That can be helpful in the long run for qualifying for other credit cards, loans and more.

But remember, as with any credit card, getting approved for a secured card isn’t guaranteed. Each lender has its own policies.

And if you eventually decide to close your account, some lenders may give you your deposit back. For example, Capital One will refund your deposit if you pay off the card and close your account. Or you can get it back as a statement credit if you exhibit responsible behavior and upgrade to an unsecured card.

Unsecured credit cards are what most people are referring to when they simply say “credit card.” Unsecured means you don’t have to pay a security deposit in advance to be approved. 

How does a secured credit card work? Other than a deposit, secured credit cards work just like unsecured cards in several ways. You can use both types of cards to make online or in-store purchases, and you’ll receive a statement at the end of the billing cycle. And you’ll likely be charged interest if you don’t pay off your balance in full each month.

Unsecured credit cards may come with lower interest rates and fewer fees than secured cards. And you may be approved for a higher credit limit, which can help improve your credit utilization ratio. As a bonus, many unsecured credit cards also offer rewards you can earn.  

Remember, if you don’t qualify for an unsecured credit card, responsible use of a secured card may help you build credit. And that could eventually allow you to graduate to a card that offers rewards and other perks.

Establishing or rebuilding your credit generally works the same way with both types of credit cards. The card issuer typically reports your account activity—such as payment information, account history and card balance—to the credit bureaus. Then credit-scoring companies can use that information to calculate your credit scores.

Keep in mind that not all issuers report the status of secured cards, though. If better credit is your goal, look for a secured card that reports to at least one of the three major credit bureaus. Capital One and some other companies that issue secured credit cards will report your status to credit bureaus on a regular basis.

According to a 2016 Federal Reserve report, consumers who kept a secured credit card open for at least two years saw their credit scores increase by 24 points on average. Of course, results vary from cardholder to cardholder. According to the Federal Trade Commission, your credit score may drop if you miss credit card payments, max out your card or open too many accounts at once.

The Consumer Financial Protection Bureau (CFPB) also has helpful tips on building up your credit. Focus on paying your credit card bill on time each month. Aim to pay off the balance in full each month or at least keep the balance low. And try not to use more than 30% of your credit limit.

Everyone’s financial situation is unique, so the credit card that works best for another person might not work for you. When comparing your options, consider which credit cards you might qualify for.

Pre-approval or pre-qualification can help you compare options and find the right fit. And with pre-approval from Capital One, you can find out whether you’re pre-approved for some of Capital One’s credit cards before you even apply. It’s quick and only requires some basic info—and it won’t hurt your credit score.

You can monitor your credit progress usin CreditWise from Capital One. This tool is free for everyone, even if you’re not a Capital One customer. You can check your VantageScore® 3.0 credit score and TransUnion® credit report as often as you’d like, without hurting your credit.