Unsecured credit

What is an unsecured credit card?

How are unsecured credit card limits calculated?

When you open a secured credit card, your spending limit equals the deposit you post as collateral. When you get an unsecured credit card, there’s no security deposit to base your spending limit on. Credit card issuers use other factors to determine how much purchasing power to give you. These include your:

  • Payment history – if you have a habit of paying your bills on time, credit card companies may be more willing to give you a higher credit limit
  • Credit utilization – your credit utilization rate indicates how much of your existing credit you are already using, and the lower this number, the more likely you are to get a generous spending limit
  • Income – the more money you earn, the more likely you are to receive a higher credit limit on an unsecured card

What benefits do unsecured credit cards offer?

Unsecured credit cards give you the option of opening a new account without having to put down any money as a deposit, and they usually offer built-in perks like cash back or rewards points. Now, some secured credit cards also offer rewards, but they are more common with unsecured credit cards.

Additionally, some unsecured credit cards offer sign-up bonuses. With a sign-up bonus, you get a certain cashback or points for spending a specific amount of money within a predefined time frame. For example, you may qualify for a credit card offer where you get $200 cash back for spending $1,000 within three months of opening a new unsecured credit card.

Finally, if you have excellent credit, you might qualify for a good APR on an unsecured credit card. And in this case, if you need to carry over a balance for an emergency, it may not cost you as much.

What are the disadvantages of unsecured credit cards?

With a secured credit card, you are effectively protected against indebtedness because your spending limit is equal to the security deposit you put into your account. Since unsecured credit cards don’t require a deposit and your spending limit is based on your credit score and other factors, you could easily find yourself in a situation where you charge more than you can afford. allow you to pay in a given month.

When this happens, you may need to carry over a credit card balance. This will cause you to accrue interest charges which will cost you more money. And too high a credit card balance across all of your cards could cause your credit score to drop, making it harder to qualify for other credit cards or loans when you need options. of borrowing.

Also, with an unsecured credit card, your credit card’s APR can be variable. This could make your payments harder to manage if you need to carry a balance.

Is it wise to use an unsecured credit card?

Unsecured credit cards are extremely common and many consumers use them. If managed well, they can be a useful and practical financial tool. But they can also be a riskier prospect than secured credit cards.

If you’re going to get an unsecured credit card, make sure you follow these rules:

  1. Only charge expenses you can afford by the time your bills come due (there may be exceptions here for emergencies, but for the most part try to pay your balance each month in full)
  2. Never miss a minimum payment, as this will automatically negatively impact your credit score
  3. Check your credit card balance regularly to keep an eye on your spending
  4. Always read your credit card agreement to understand your card terms, including your total line of credit, interest rate and payment schedule.

If you’re able to qualify for an unsecured credit card, there’s no reason to limit yourself to a secured card unless you don’t trust yourself to be financially responsible. Make sure you understand how to use credit cards responsibly before proceeding.