Secured vs. Unsecured Credit Cards: Which is best for your financial needs?

A credit card is a financial tool accessible to many, unlike the common belief that it can only be availed by people with good credit history. You may often wonder if there are many conditions to getting a credit card. However, some credit cards do not require such conditions.

Secured credit card

A secured credit card is issued against collateral, mostly a cash deposit or fixed deposit, similar to a loan. Banks and NBFCs issue secured credit cards against fixed deposits. Secured credit cards work differently from usual credit cards. The credit limit for a secured credit card is determined according to the credit limit.

Typically, the credit limit for a secured credit card is around 75-85% of the total fixed deposit amount. Therefore, your credit limit will be in accordance with your fixed deposit amount. The higher the deposit, the higher the credit limit and vice versa.

Advantages of secured credit card

1. Earn interest: You can earn interest on your fixed deposit against which your credit card has been issued; hence, you can get both a credit card and interest through this deposit.
2. Rebuild credit: If you have a poor credit score, you can use a secured credit card to build your credit score. Keep in mind that paying your dues on time will improve your credit score; failing to do so will deteriorate your credit score further.
3. Easy access: Getting a secured credit card is easier than getting an unsecured credit card. A secured credit card just requires a fixed deposit. It does involve multiple verifications, such as income proof, credit score, etc. which is required in an unsecured credit card.

Disadvantages of secured credit card

1. Limited credit limit: The credit limit is determined according to the fixed deposit in a secured credit card, which is 75% to 85% of the total amount. Hence, if you deposit a lower amount, the credit limit will be limited.
2. Funds: You will need enough funds to meet the requirements for a fixed deposit against which you can apply for a credit card. The minimum fixed deposit amount may vary from bank to bank, but it is typically in the range of ₹10,000 to ₹25,000.
3. Fixed amount: The amount deposited as a fixed deposit remains locked in the account. You can use this amount only after you close your credit card account. Banks may convert your fixed deposit amount into a regular account only if they feel your credit card account is good.

Unsecured credit card

An unsecured credit card does not require any collateral or deposits. Banks and NBFCs issue this credit card on the basis of your credit score, credit report, and other factors that determine your creditworthiness. The credit limit for an unsecured credit card is determined by credit score, income, credit utilisation ratio, existing debt etc.

Advantages of unsecured credit card

1. Collateral: An unsecured credit card does not require any collateral. Hence, you do not have to deposit an amount to get a credit card.
2. Credit limit: A good credit history and credit score will help you get a higher credit limit on your card. It is not solely determined by the fixed deposit amount.
3. Many options: There are many unsecured credit card options available, suiting your needs, and providing various rewards and offers according to your requirements when compared to a secured credit card.

Disadvantages of unsecured credit card

1. Higher credit score: You will need a good credit score to get an unsecured credit card. A lower credit score may result in the rejection of your credit card application.
2. Time-consuming process: When compared to a secured credit card, getting an unsecured credit card will require multiple verifications by issuers in terms of credit history, debt, credit score etc. Therefore, the process to get a secured credit card may be longer. It will also require more documentation work, making the process lengthier.

Secured vs. unsecured credit card

1. Secured credit cards are issued against collateral, whereas unsecured credit cards do not require collateral.
2. The application process and required documents may differ for both cards. However, check with your credit card issuers for the application process and documents needed, as they may vary from one another.
3. For unsecured credit cards, the credit limit is determined by credit score, credit history, debt, etc., whereas the credit limit for a secured credit card is determined by the fixed deposit amount.

What should you go for?

According to Abhishek Saxena, MD and Co-Founder of Omnicard, “Switching to secured cards provides businesses with a secure and controlled way to manage expenses while ensuring policy adherence. Unlike unsecured cards, secured cards come with preloaded spending limits, offering better budget management and eliminating the risk of overspending.”

“When the funds are preloaded, ensuring better spend management becomes easier than ever. This also helps reduce exposure to fraud and unauthorized transactions. Thanks to these fundamental security features built in, secured cards are an ideal choice for organizations to help optimize financial controls and mitigate risks,” Saxena added.

However, in both cases, you must clear your credit card dues on time to avoid interest and late payment fees, which will, in turn, affect your credit score. Additionally, you should look into your financial health before opting for either.

In conclusion, the reasons for choosing a secured credit card or an unsecured credit card may differ from person to person. People with good credit history can opt for an unsecured credit card, whereas people with poor credit history can choose a secured credit card.

(Note: Using a credit card carries its own set of risks)