Secured vs Unsecured Credit Cards: Which Is Right For You?

"An unsecured credit card? A credit card is just a credit card, isn't it?" We can see the questions racing through your head.

Usually, when you refer to a credit card, it's an unsecured credit card because the majority of credit cards in use fall into that category. An unsecured credit card would not suit you if you are new to credit and trying to build a credit history.

So, what's the difference between a secured and unsecured credit card? Follow us, as we detangle these two credit card types, explain the key differences, and help you make the right choice!

Secured credit cards

A secured credit card is approved against the security of a fixed deposit, which is controlled by the bank. It acts as a guarantee should you default or not pay your dues regularly. Since secured credit cards are given mostly to individuals with little or no credit history, it amounts to a higher risk for banks. The fixed deposit is the bank's way of protecting themselves against potential losses.

It's advantageous for you too, as the fixed deposit continues to earn interest.

P10 tip

Activity on secured credit cards shows up on your credit history, which helps build your credit score. However, double-check to make sure your report is free of errors and that your card activity is being reported to credit bureaus.

Unsecured credit cards

Unsecured credit cards do not require a security deposit. Banks approve them based on various factors that rank you on your ability to make payments on time. These factors include a strong credit profile, meeting a certain income bracket, evaluation of existing debt etc. Unsecured credit cards usually have lower interest rates and have valuable features like cashback options and reward programmes.

P10 tip

Choose unsecured credit cards based on your lifestyle and usage. This again brings us back to ground zero - your budget. Analyse where you spend the maximum money each month (groceries, fuel, entertainment etc.) and try to match a card with those categories.

Secured vs unsecured: which one should you choose?

A secured credit card is for you if you

• are new to credit

• want to build and improve your credit history

• are keen on developing responsible credit behaviour

• want to leverage shorter approval times

• have just started working

Secured credit cards are convenient to get started, but they are limiting. Apart from requiring collateral, they offer low credit limits, and the money in your fixed deposit is unavailable to you as long as you use the card.

An unsecured credit card is for you if you

• already have a good credit history

• are looking to add on credit lines

• have been working for a few years and meet the income eligibility

• want specific reward programmes and benefits like travel points, lounge access etc.

An unsecured credit card sounds tempting. But you might also need to pay annual fees, wait out long approval times, and be watchful not to overshoot your budget.

Both secured and unsecured credit cards have their pros and cons. Whichever card you choose it's imperative not to miss or delay payments. Eventually, a lot of financial decisions boil down to having an unblemished credit history and a good credit score, and both secure and unsecured cards help you shape them.

About the author:

Vikas Kothari is the founder of P10 Bank, a digital banking startup designed for young working professionals.