Is a Credit Card Secured or Unsecured Debt?

Credit cards can be secured or unsecured debt, and either type can be useful for building and using credit. 

Understanding the differences between unsecured and secured credit cards can help you use credit efficiently, build a strong credit history, and avoid needing debt relief. 

What Is Unsecured Debt?

Unsecured debt is debt that does not require any sort of collateral to guarantee payment. Instead, the lender decides whether to provide credit based on your credit history and your financial situation.

Even though you aren’t risking any collateral with unsecured debt, it still represents a legal obligation—you can be sued if you don't make the payments on an unsecured debt. Nonpayment is also likely to hurt your credit score and be reflected in your credit history, which makes it more difficult to get more credit.

Common types of unsecured debt include:

• Unsecured credit cards

• Unsecured personal loans

• Medical debt

• Buy Now Pay Later credit

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A Credit Card Is Usually an Unsecured Debt

According to a survey by the Consumer Financial Protection Bureau, as of the second half of 2024, around 90% of credit cards were unsecured. 

So why is that? Because even though collateral gives credit card companies some protection against non-payment, they don't really make their money that way. After all, cashing in a borrower's collateral usually only means getting back money they loaned, not profiting. 

What credit card companies really want is for you to use your credit card for a long time, making purchases, carrying a balance at times, and keeping up with your payments. That way, they make money from the fees merchants pay and the interest you pay on your account.

So in most cases, credit card companies decide whether to issue you a card based on the likelihood that you can be relied on to pay what you owe. They judge this likelihood based on:

• Your credit score, which is based on your credit history and current use of credit.

• The types of credit you've had, and how you've handled it.

• Your financial situation, such as how the amount of debt you have compares to your income.

Since this judgment involves weighing a number of factors, some credit card holders represent a bigger risk to the card issuer than others. Credit card companies manage this risk in a couple of ways:

• Through your credit limit. Your credit card balance is the amount of money you owe the card issuer at any one time. If you have a limited credit history or a relatively low credit score, a credit card company may issue you a card, but keep your credit limit low. That way they don’t have as much money at risk.

• Through the interest rate. Riskier customers are charged higher interest rates. That way, the money the credit card company earns on those accounts can make up for customers who don't pay their bills.

Over time, making on-time payments to your credit accounts can benefit you in a few ways:

• Your credit score could improve. Payment history is the biggest factor affecting your score. 

• The credit card company might raise your limit, because you’ve demonstrated that you pay off your card reliably. 

• You might qualify for a better interest rate.

Unsecured credit is based on trust. As you prove you repay reliably, you could qualify for more credit and better credit terms.

What Is Secured Debt?

A secured debt is one for which you put up something of value as a guarantee of payment. This may be cash or some sort of property. That cash or property is known as collateral. If you don’t repay the debt, the lender can take the collateral instead.

For some loans, secured debt is the norm. For example, a mortgage on a home uses that home as collateral. If you don’t pay your mortgage, the lender can foreclose on the home and sell it to recover the balance you owe.

Similarly, car loans typically use the vehicle being purchased as collateral. If you don't pay your car loan, the lender can repossess it and sell it to get back what you owe.

Having collateral gives lenders the confidence to make loans. This can work two ways:

• Putting something of value at risk gives the borrower a strong incentive to keep up with payments.

• Being able to claim that collateral gives the lender a way to get their money back if the borrower doesn't make payments.

Some types of credit can be secured or unsecured. For example, personal loans can be either. So can credit cards. 

A Credit Card Is Sometimes Secured Debt

The majority of credit cards are unsecured, but there are also many secured cards available. If a card is secured, you have to offer collateral to get it. With secured cards, the collateral is money you deposit with the credit card issuer. 

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

With many secured credit cards, your credit limit is often equal to the amount of your security deposit (paying a $200 security deposit, for instance, gives you a $200 credit limit). Some cards give a higher limit than the deposit amount. 

Why would you put down a deposit to get a credit card? If you have a limited credit history, or you’ve had credit problems, you might not qualify for a traditional credit card. A secured card may be the best way for you to get credit.

There are a few ways to get your deposit money back. One is to close the account. Assuming all charges are paid off, your deposit is returned to you. Another is to use the card and reliably pay the bill for a while. 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. If you’ve established a good payment record with the secured card, you may now qualify for an unsecured card. Once your balance on the secured card is paid off, you can close the account and ask for your deposit back.

What Is the Difference Between Secured and Unsecured Debts?

The basic difference between secured and unsecured debts is that secured debts have collateral and unsecured debts do not. That in turn has a big impact on how borrowers and lenders should view these types of debt.

With secured debt, the borrower is putting something at risk. That may be physical property, like a house on a mortgage loan, or a car on an auto loan. For secured credit cards, collateral comes in the form of a cash deposit. The risk to the borrower is that if they default on their payments, the lender can take the collateral. 

On the other hand, when there's no collateral, lenders are taking a bigger risk. As a result, they are likely to use tougher approval standards. These standards may include higher credit scores and a higher income.

There are also some similarities in how secured and unsecured debt works. With both types of debt, you have a legal obligation to pay what you owe. Also, both secured and unsecured debt affect your credit score. 

One way lenders manage risk for both secured and unsecured debt is via interest rates. In short, lenders are likely to charge riskier borrowers a higher interest rate. The extra money they earn on higher-interest loans helps cover the cost of borrowers who don't pay what they owe.

For example, with both secured and unsecured credit cards, borrowers with excellent credit are typically charged much lower interest rates than those with poor credit scores.

Pro tip: No matter what your credit score is and what rate your card charges you, you can avoid paying credit card interest by paying off your balance in full each month. Just be sure to choose a card that offers an interest-free grace period. Most do.

The following table summarizes the similarities and differences between secured and unsecured debt:

How to Choose Between Secured and Unsecured Credit Cards

So, which is better—a secured credit card or an unsecured credit card? The answer depends on your credit history and how you intend to use the card. 

There are a few factors you should look at when choosing any type of credit card. Let’s review those factors, and how your needs affect what you should look for.

It’s important to research the right card and try not to apply for something that you won’t qualify for. Each time you apply, the creditor will check your credit and you could lose a few points off your credit score. You’ll regain those points over the next 12 months.

Credit level

Some credit cards are available only to people with excellent credit, while others are available to people with poor credit, or little or no credit history.

If you have excellent credit, you can pretty much take your pick of credit cards, based on things like interest rates, fees, rewards, and other perks.

On the other hand, if you have a lower score or a limited credit history, you may do better to focus your search on secured credit cards. These may be your best chance of qualifying for a card now, and they may also help you build the credit history you'll need to have more credit choices in the future. 

Annual fees

Many credit cards have annual fees. These may also be called maintenance or membership fees. They apply for as long as you have the card, no matter how you use the card.

Most credit cards do not have annual fees. This is true for both secured and unsecured cards. So, with a little shopping around, you should be able to find a card without an annual fee.

For example, Capital One offers secured and unsecured cards with no annual fees. 

So, if most credit cards don't have annual fees, why would anyone choose a card that does? Often, cards with annual fees offer perks such as high rewards. In those cases, think about the perks and how you'll use the card, and decide whether the perks are worth more than the annual fee.

It's also important to note that annual fees vary greatly. They can be as low as $20, or run into the hundreds of dollars. 

When you come across them, annual fees on secured cards tend to be much lower than those for unsecured cards. But there’s no reason to pay it since there are annual fee free options. 

Interest rates

Credit cards generally have higher interest rates than most forms of credit. This is true of secured and unsecured cards. However, if you have little or no credit history, choosing a secured card could help you get a more reasonable interest rate than you'd get on an unsecured card. 

It's also important to note that whatever your credit score and whatever type of card you choose, the rates offered by credit card companies vary a great deal. This makes it important to shop around. 

How big a factor interest rates should be in your decision depends on how you expect to use the card. If you generally expect to pay off your card balance within the credit card grace period, then you can almost always avoid paying interest. The grace period is the amount of time after the end of the billing you have to pay your balance before you're charged interest. Grace periods are offered by most credit cards. When there is a grace period, it must be at least 21 days.   

Credit card rewards

Credit card rewards are more common with unsecured cards than with secured cards. Still, just because you’re using a secured credit card doesn’t mean you can’t enjoy a few credit card rewards. Several secured cards offer rewards. 

Note that if you carry a balance, the interest you pay is likely to wipe out some or all of the value of the rewards you earn. So, if that's how you expect to use your credit card, pay more attention to interest rates than rewards when choosing a card. 

However, if you plan to pay off your charges every month and avoid interest, rewards may be a bigger factor in your choice. Earnings rewards without paying interest could 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.

The right mix for your needs

If you have a limited credit record or a poor credit score, a secured card is likely to give you the best chance of being approved for a credit card. However, if you use that card reliably, you should check your credit score after six months, and then regularly in the months ahead—you may find that your credit has improved enough for you to qualify for a secured card.

Whether you choose a secured or unsecured card, you should consider all these factors. The trade-offs between fees, interest rates, and rewards depend a great deal on how you expect to use the card.

All these factors can vary a great deal from one credit card to the next. That's why it's important to shop around.

Strategies for Managing Credit Card Debt

Whether you choose an unsecured or secured credit card, some simple steps could help prevent your credit card debt from getting out of hand:

• Always pay credit card bills on time. Doing so helps you avoid late fees and damage to your credit score.

• When possible, pay your balance in full each month. That means you avoid paying interest.

• Even if you can't pay the balance in full, try to make more than the minimum payment whenever possible. Paying down debt faster reduces the amount of interest you pay.

• If you have more than one credit card balance, pick one and make the biggest payment you can manage, while making minimum payments on the others. 

• Don’t increase your debt while you’re trying to pay it off.

• If you realize you're going to have trouble paying a credit card bill, consider your debt relief options as soon as possible.  

Quick Comparison of Secured vs. Unsecured Credit Cards

When looking at secured vs. unsecured credit cards, it’s important to understand the key 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. Also, if you don’t have a credit history‌ because you’re younger or if 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 a poor or no credit history.