What is an unsecured credit card?
Credit cards are quite common in modern life. When people talk about credit cards, they’re most often referring to unsecured credit cards, which means you don’t have to provide security, like a deposit, to get approved.
Unsecured credit cards are the most common cards available. People who don’t have a strong credit history, or none at all, may have trouble getting one. Unlike secured credit cards, unsecured cards are not tied to a posted security deposit, so the credit limit is determined by the cardholder’s credit.
Let’s see how an unsecured credit card works, the pros and cons, and who can get one.
What is an unsecured credit card?
Most credit cards on the market are unsecured credit cards. An unsecured credit card extends you a line of credit that you can draw on and then repay or make payments each month. Your eligibility and credit limit for an unsecured credit card is based on the issuer’s determination of whether you will be able to make appropriate payments on any balance you have on your card.
When you apply for an unsecured credit card, the credit card issuer will use your personal information, such as your annual income, as well as your credit score to determine your eligibility. Since unsecured credit cards are not secured by any type of deposit like a secured card, your card issuer will not have access to funds to manage any outstanding debt you have on your account. That’s why issuers consider a number of factors to determine the likelihood that you’ll be able to pay the charges you’ve made on your card before approving an application.
Advantages and disadvantages of an unsecured credit card
There are many advantages to using an unsecured credit card. The biggest advantage is that you simply have more options to choose from. Unsecured credit cards can range from student cards to travel rewards cards to cash back cards and more. Chances are you can find an unsecured credit card that will help you meet your spending goals.
Here are some benefits to consider:
Benefits of an unsecured credit card
- Does not require a security deposit. Your credit limit is based on creditworthiness.
- Lower interest rates and better rewards programs. Although it depends on the card, unsecured credit cards may have lower interest rates and more lucrative rewards. Many unsecured credit cards have great introductory offers to entice applicants, offering the chance to earn bonus miles, points, and cash back. And on top of that, you can also have the option of a 0% APR period, which means you can shop interest-free for an introductory period before the regular APR kicks in. .
- Few (or avoidable) costs. Another benefit of an unsecured credit card is that you’ll likely have fewer fees to pay. There are a variety of unsecured credit cards that have no annual fee, and many also have no foreign transaction fees.
While unsecured credit cards have a lot to offer, there are a few downsides to consider.
Disadvantages of an unsecured credit card
- Harder to get approval. Unsecured credit cards require a good credit rating and credit history. If you don’t have good credit or no credit history, you may have trouble getting one.
- Easier to spend beyond your means. Although unsecured credit cards are riskier for lenders because they are not backed by collateral, they also pose a risk to the cardholder i.e. more purchasing power. Your credit limit can be thousands of dollars or a few hundred dollars; however, when you use your card to make a purchase, it is important to have the means to pay your bill in full at the end of the month. Because if you don’t, the interest will start accumulating and you could find yourself in a sticky situation.
Who should get an unsecured credit card?
If you have bad credit or no credit history, you may have trouble getting an unsecured credit card approved. Credit cards aren’t a one-size-fits-all type of situation, so it’s important to consider options that will actually benefit you in the long run. Here are some examples of different types of consumers who can (or should) consider unsecured credit cards:
- The budget: If you’re already aware of how much money you’re spending each month, chances are you have a good credit history. It can also mean that a big mistake led you to create stronger habits. Either way, you’re in a position where an unsecured credit card can help you earn money on your everyday purchases. Paying the bill for that huge family grocery store you take on once or twice a month doesn’t have to be an errand you dread. You have the option to earn a fixed percentage on qualifying purchases or opt for tiered categories suited to areas where you spend a lot each month, such as groceries, restaurants and entertainment or even gas .
- The great traveler: If you travel often for business or are just a jet-setter who likes to zip around the world, a travel rewards credit card can help you earn miles and points to help offset the cost of travel. Many travel cards sell for a hefty price every year, but they’re also known for their generous sign-up bonuses and luxury perks like airport lounge access. The typical base credit score requirement for a travel card is good to excellent (670-850), which could make it difficult to get if you fall below 670.
- The business owner: Business credit cards are designed to help businesses profit from their daily expenses. You don’t have to own a storefront to qualify; freelancers can also take advantage of generous rewards programs and expense tracking. Business credit cards are generally well balanced, offering excellent rewards rates, no foreign transaction fees, no annual fees, and juicy sign-up bonuses. These rewards and perks vary from card to card, but there are plenty of solid cards on the market, ranging from hassle-free cashback rates for startups to more luxurious travel perks for people who travel a lot. business. Like travel rewards cards, business credit cards generally require a credit score between good and excellent (670-850) to qualify.
What credit score do you need to apply for an unsecured card?
An unsecured credit card uses your credit score to help you determine if you are capable of handling credit and payments responsibly. The higher your credit score, the more options you will have for unsecured credit cards. Most unsecured credit cards require good to excellent credit (670-850). This range is where you will become eligible for many types of rewards cards. You can also find cards that will accept a fair to good score (580-669). Once your score drops below 580, your options become much more limited. While you can still find unsecured cards, you’ll likely have to pay more fees and probably won’t get the same kinds of rewards options.
Alternatives to unsecured credit cards
If your credit rating is at the lower end of the rating range, you’re more likely to get a credit card if you apply for one that allows a lower credit rating.
Another way to get an unsecured credit card with bad credit is to become an authorized user on someone else’s account. Authorized Users do not have to meet the same credit criteria as Primary Cardholders, as they are not responsible for payments on the credit card account. Although they have no legal responsibility to pay with the credit card they are authorized to use, authorized users can reap the benefits of card activity on their credit scores. You just need to make sure the card issuer includes authorized users in their reports. So, as an authorized user, you can have access to a credit card and increase your credit score at the same time.
One last thing you can do to get an unsecured credit card with bad credit is to simply work to improve your credit rating. One way to do this is to apply for a secured credit card. Using a secure credit card for small purchases and paying your balance in full each month is a great way to establish a reliable payment history and boost your credit score. Another thing you can do to boost your credit score is to sign up for Experian Boost. Experian Boost is a free program that gives you the option to include your regular payments for things like your cell phone and your rent in your payment history on your credit report.
The bottom line
Unsecured credit cards have few downsides that make them unattractive to the everyday consumer, so we can only offer two. But with that in mind, what is not to love? They don’t require a security deposit, and the products available on the market today offer well-rounded benefits and rewards to appeal to almost everyone. If you’re new to the credit card game and aren’t quite skilled yet, it’s not the end of the world. A secured credit card can help you build your credit score while learning what your long-term financial goals may be. Who knows, you might switch to an unsecured card long before your due date simply by creating good habits and sticking to them.