Is a Credit Card Secured or Unsecured Debt?

A credit card is a convenient way to make purchases before you pay for them. Any time you charge something to your card, that purchase becomes a debt until you pay it off. There are different kinds of debt, some more consumer-friendly than others. 

Here we’re talking about secured and unsecured debt. Let’s look at the differences and better understand where credit cards fit in. 

What is the difference between secured and unsecured debts?

Secured debt requires collateral. Collateral is something that a lender can take and sell if you don’t pay your debt. 

For example, car loans are secured debt. The collateral is the car. If you don’t make your loan payments, the lender can come and take the car from you. If you default on the loan, the lender takes the car back and sells it, hoping they can recover their losses.

Other types of secured debt include home mortgages and pawnshop loans.

Unsecured debt doesn’t require any type of collateral. Instead, you receive money based on your creditworthiness. 

For example, student loans are unsecured debt. So are most personal loans and credit cards.

Since there is no collateral, there is nothing for the lender to take and sell if you don’t make your payments. 

What happens if you default? They might sue you for credit card debt and win a judgment against you, but, in most cases, they can’t take your home or car. 

When there is no collateral, the lender is taking a bigger risk, so unsecured debt often comes with higher interest rates, compared with secured debt.

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A credit card is usually an unsecured debt

Usually, a credit card is an unsecured debt. The credit card issuer looks at your credit history and credit score and decides to issue you a credit line.

Your credit card includes a credit limit. If you don’t have a credit history or your credit score is low, your card may have a modest limit, such as $300. This is a way for the creditor to limit losses if you fail to pay back your charges.  

As you make on-time payments, two things are likely to happen. One, your credit score should improve. Payment history is the biggest factor affecting your score. Two, your credit card company might raise your limit, because you’ve demonstrated that you can use your card responsibly. 

A credit card is sometimes secured debt

Some credit cards are secured. That means that to get one, you have to offer collateral. In this case, the collateral will be money. 

The money is not upfront payment against your charges (that’s how a prepaid debit card works). Your deposit is a safety net for the credit card issuer. If you use the card, you’ll still have to pay the bill each month. But if you fail to repay your debt, they keep the money. 

On many secured credit cards, your credit limit will be equal to the amount of your security deposit. So, paying a $200 security deposit gives you a $200 credit limit. Some cards give a higher limit. You might get a $200 limit with a $75 deposit and a $500 limit with a $150 deposit.

Later on, there are a few ways to get your money back. One is to close the account. Assuming all charges are paid off, your deposit will be returned to you. Another is to use the card responsibly for a period of time. Some issuers automatically convert your account to an unsecured credit card and return your deposit after six to 12 months. If that doesn’t happen automatically, you can apply for an unsecured credit card yourself after six to 12 months and then shut down the secured account.

Quick comparison of secured vs. unsecured credit cards

When looking at secured vs. unsecured credit cards, it’s important to understand some differences.

Many unsecured credit cards require a minimum credit score to qualify. If you’ve recently experienced bankruptcy or another financial setback, you might not qualify for an unsecured credit card. Additionally, if you don’t have a credit history, perhaps because you’re younger or you recently moved to the U.S. from another country, you might not be able to get an unsecured credit card right away.

Secured cards generally have much lower credit requirements. Because you’re offering a cash deposit, you can usually get a secured card even if you have poor or no credit. 

When is it a good idea to get a secured credit card? 

A secured credit card can make sense if you’re trying to establish or rebuild your credit history. You can use one to learn how to handle credit responsibly (or prove that you already know how). Secured credit cards can be perfect as a first or a getting-back-on-your-financial-feet credit card. By their nature, they are a stepping stone to unsecured credit. 

Before you apply, get to know the available options. People with no credit or bad credit are often targeted for excessively expensive financial products. Here’s what to look for.

Secured credit card fees

Some secured credit cards have annual fees, maintenance fees, program fees… you get the idea. Many secured cards charge none of these fees. Search online for “best-secured credit cards” and check out the options.

Example: Capital One has a secured credit card with no annual maintenance or program fee.

Secured credit card interest rate

For the most part, secured cards come with higher interest rates than unsecured credit cards. It doesn’t have to matter. If you’re using your card in the best way possible, you’ll never pay interest. 

Here’s how.

The vast majority of credit cards come with a grace period, or a certain number of days from the end of the billing cycle to your payment due date. If you pay off your charges during this grace period, you won’t pay interest. If you manage to do this, no matter what kind of credit card you have, you’re paying zero percent interest. 

Example: U.S. Bank offers a secured credit card with a 24-30 day grace period.

Secured credit card rewards

Just because you’re using a secured credit card doesn’t mean you can’t enjoy a few credit card rewards. Remember that if you carry a balance, the interest you pay will wipe out the value of the rewards you earn. But if you’re planning to pay off your charges every month and avoid paying interest, a rewards card can be a smart way to make your credit card work for you instead of the other way around.

Example: The Discover it secured credit card offers unlimited cash back on your purchases.

Making a cash deposit to get a secured credit card can be a good financial move. Compare options, keep costs down, and pay off your balance every month for optimum results.