Most credit cards offered are unsecured credit cards. They are a type of credit card that does not require a security deposit and include a revolving credit. This means that the cardholder does not have to put up any collateral in order to get the card. Instead, the card issuer extends credit to the cardholder based on their creditworthiness, which is determined by their credit history, income, and other financial factors.
How does an unsecured credit card work?
An unsecured credit card works just like any other credit card. The cardholder is given a revolving line of credit, which is the maximum amount of money they can borrow from the card issuer. The cardholder can then use the card to make purchases or withdraw cash at ATMs. By paying down the balance, you increase your available credit and are able to borrow against your credit limit repeatedly without needing to apply for a new line of credit.
The card issuer charges the cardholder interest on any unpaid balances, and the cardholder is required to make minimum monthly payments towards their balance.
Pros and cons of an unsecured credit card
There are several pros and cons to using an unsecured credit card.
- No security deposit required: One of the main benefits of an unsecured credit card is that it does not require a security deposit. This means that the cardholder does not have to have a large sum of money available upfront in order to get the card.
- Build credit: Another benefit of an unsecured credit card is that it can help the cardholder build or improve their credit. By using the card responsibly and making on-time payments, the cardholder can demonstrate to credit agencies that they are a responsible borrower, which can help to improve their credit score.
- Rewards programs: Many unsecured credit cards offer rewards programs that give cardholders points, cash back, or other perks for using the card. These rewards can be a great benefit to cardholders who use their card frequently.
- Lower interest rates: Another advantage of an unsecured credit card is that they generally have lower interest rates than a secured credit card. This can make it more affordable for cardholders to carry a balance on their card and can help to reduce the overall cost of borrowing.
- Harder to get approval: One potential drawback of an unsecured credit card is that they may be harder to get approval for than secured credit cards. This is because the card issuer is taking on more risk by extending credit without a security deposit.
- Easier to go into debt: Another potential downside of an unsecured credit card is that it may be easier to go into debt with this type of card. Without the security deposit to act as collateral, cardholders may be more likely to overspend or carry a balance, which can result in high interest charges and negative impacts on their credit score.
Unsecured card vs. secured card
An unsecured credit card is different from a secured credit card in that it does not require a security deposit. A secured credit card, on the other hand, does require a security deposit. The size of the security deposit is usually equal to the credit limit of the card, and it acts as collateral for the card issuer in case the cardholder is unable to make their payments.
While unsecured credit cards are harder to get and do not require a security deposit, they may have lower interest rates and higher limits than secured credit cards. Secured credit cards, on the other hand, may have higher interest rates and lower credit limits, since the limits are set by the amount of your security deposit.
What credit score is needed for an unsecured credit card?
The credit score needed for an unsecured credit card can vary depending on the card issuer and the specific card. In general, however, most unsecured credit cards require a credit score in the good to excellent range (670-850). This range is where you’ll become eligible for many higher value reward credit cards and will likely be offered more attractive terms, such as lower interest rates and higher credit limits.
It is possible to find unsecured credit cards that will accept a score in the fair range (580-669), but these cards may have higher fees and may not offer the same kinds of rewards as cards that require a higher credit score. Once your credit score dips below 580, your options for unsecured credit cards become much more limited. While you may still be able to find unsecured cards, you will likely have to pay more fees and may not have the same rewards options as those with higher credit scores.
How to qualify for an unsecured card
There are a few things that cardholders can do to increase their chances of qualifying for an unsecured credit card:
- Check your credit score: The first step to getting an unsecured credit card is to know your credit score. This will give you an idea of which cards you may be eligible for and what terms you may be offered. You can check your credit score for free through one of the major credit reporting agencies (Experian, TransUnion, and Equifax) or through a credit score service like Credit Karma.
- Shop around: Different card issuers have different credit requirements, so it’s a good idea to shop around and compare offers from multiple issuers. This will help you find the card that is the best fit for your credit profile.
- Consider a co-signer: If you have a limited credit history or a low credit score, you may be able to increase your chances of getting an unsecured credit card by getting a co-signer. A co-signer is someone who agrees to be responsible for your credit card debt if you are unable to pay.
- Improve your credit: If you have a low credit score or a thin credit history, you may want to focus on improving your credit before applying for an unsecured credit card. This may involve paying down any existing debt, paying all of your bills on time, and avoiding opening new credit accounts.
Alternatives to unsecured credit cards
If you are unable to qualify for an unsecured credit card, there are a few alternatives you may want to consider:
- Secured credit card: As mentioned earlier, a secured credit card is a type of credit card that requires a security deposit. While it may be more difficult to get a secured credit card than an unsecured card, it can be a good option for those with limited credit or a low credit score.
- Credit-builder loan: A credit-builder loan is a type of loan that is specifically designed to help people build or improve their credit. With a credit-builder loan, the borrower makes regular payments to a bank or credit union, and the funds are held in an account until the loan is paid off. This can help the borrower demonstrate to credit agencies that they are a responsible borrower and improve their credit score.
- Prepaid debit card: A prepaid debit card is a type of card that is funded by the cardholder rather than by a credit issuer. The cardholder loads money onto the card and can then use it to make purchases or withdraw cash at ATMs. While prepaid debit cards do not offer credit, they can be a good option for those who need a payment card but are unable to qualify for a credit card.
- Charge card: A charge card is a type of credit card that requires the cardholder to pay their balance in full each month. Unlike traditional credit cards, charge cards do not have a pre-set spending limit, and they do not charge interest on unpaid balances. However, they may have higher fees than traditional credit cards and may be more difficult to get.