Do you really need a secured card if you have bad credit?

Editor’s note: This is a recurring post, regularly updated with new information and offers.

Whether you’re buying a home, leasing a vehicle or applying for a new credit card, a healthy credit score has a significant impact on attaining a low interest rate or upping your approval odds. If you have poor credit or no credit history, getting a loan or line of credit may prove to be a challenging quest toward your financial goals.

A commonly suggested strategy to help build — or rebuild — your credit score is to apply for a secured credit card. A secured credit card requires a refundable security deposit in exchange for a line of credit when the account is opened. These cards typically lack meaningful benefits. They also don’t earn any rewards or have a minimalist earnings structure.

Given that secured cards aren’t exactly the most appealing products out there, are they really necessary? Let’s dive deeper into the world of credit-building to find out.

Check your credit score first

Before you click ‘submit’ on that new credit card application, make sure you’ve checked your credit score. Luckily, there are many ways to check your credit score for free. By knowing your score beforehand, you’ll have a better idea of what credit card products you may qualify for and what interest rates to expect.

Credit scores range between 300-850, with a credit score of 720 or above considered excellent. Most rewards credit cards will require a credit score of 670 or higher.

If you want to open an unsecured credit card, you’ll have a difficult time if your score falls below 670. It isn’t impossible, but the only cards you’ll have a chance for are beginner options.

Make sure your credit is reported to the three major bureaus

The reason a credit card is such a useful tool for building your credit is that credit issuers report your credit card balances to the three major credit reporting agencies — Equifax, Experian and TransUnion. If you’re paying your credit card balance in full and on time each month, you’ll likely experience a rise in your credit score over time.

If you own an unsecured credit card, that account information is guaranteed to be on your credit report. The majority of unsecured cards issued by major banks report to the three credit bureaus, but some may only report to one or two. However, not all secured credit cards report to all three major credit bureaus.

That can be a compelling reason to favor an unsecured card. Before applying for a secured card, double-check whether they report your score to credit bureaus.

Security deposits are required on secured cards

Contrary to secured credit cards, unsecured cards do not require a security deposit for approval. The amount you put down as a deposit is essentially your credit limit.

If you have low income or bad credit, issuers want some sort of reassurance that they’ll get the money you spend back in some way. That’s why it can be very difficult to get approved for an unsecured card when you’re in the process of building credit. The deposit required by lenders on their secured card products covers them if a borrower fails to pay off their credit card balance in full every month.

Many secured card issuers require a deposit of at least a few hundred dollars to open an account. For example, the popular OpenSky® Secured Visa® Credit Card and Discover it® Secured Card require a $200 minimum security deposit upfront.

Keep in mind that lenders put restrictions on the maximum amount you can deposit, so if you need a higher credit limit, you may want to look at unsecured card options.

The information for the Discover it Secured has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Higher interest rates with secured cards

In addition to the deposit, secured cardholders may face nonrefundable costs such as annual fees, monthly maintenance charges and higher interest rates than unsecured cards.

APRs tend to be significantly higher for secured credit cards than unsecured versions, as borrowers of secured cards usually are a riskier business proposition for credit issuers. However, as long as you’re using your credit card responsibly and paying off your entire balance each month, the additional fees that accompany certain secured cards should not be of concern to you.

If you need a bit more wiggle room with your credit card purchases, you may want to consider a credit card that offers 0% APR for an introductory period on new purchases. These cards are normally unsecured; therefore, you must be disciplined to ensure you pay off your entire balance before the 0% APR promotional period ends to avoid high interest charges.

You can avoid annual fees

Several popular secured credit cards do not incur an annual fee, but if they do, it’s usually under $50. This annual fee is tacked on to add some guarantee for the lender and mitigate the risk of lending money to individuals who could potentially default on their credit card balance.

With so many card options to choose from, you should assess both unsecured and secured options to determine whether you can avoid an annual fee.

You may be surprised to find out that there are several unsecured cards, many without an annual fee, that have lenient approval odds—even with subpar credit. These cards deliver attractive rewards and ongoing benefits for cardholders.

If you’re working on improving your credit but have an above-average score, you may as well look at the best starter travel cards on the market. Otherwise, prioritize credit improvement and choose a card without an annual fee that’s right for you.

Credit limit restrictions

With secured credit cards, the amount of your security deposit is the amount of your credit limit. Because there’s a maximum amount you can put down for a security deposit on secured cards, there’s a strong probability that your credit limit may be higher with an unsecured credit card.

Of course, this factor is determined by your creditworthiness, and lenders have been known to increase your credit limit if you’ve demonstrated six months or more of responsible credit behavior with a secured card.

A high credit utilization ratio shows you’re a high financial risk, as you’re likely to overextend your debts. With credit utilization making up as much as 30% of your total credit score, it’s imperative to keep your spending manageable so you can pay your balance in full every month.

Getting a low credit limit can be frustrating, but unfortunately, it’s a reality that many have to face when building credit. If your credit score is subpar or you have minimal income, credit issuers aren’t going to issue you a $5,000 credit line.

Bottom line

While secured credit cards are specifically designed for people with less-than-stellar credit, there are plenty of valuable no-annual-fee unsecured credit cards that can help increase your credit score after months of responsible credit management.

Whether you’re a credit card novice or have had ups and downs managing your credit, make sure to examine the terms of secured and unsecured card products thoroughly to determine what type of card aligns with your needs.

Related: Top 6 mistakes every points and miles beginner makes