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An unsecured credit card is what you typically think of when someone mentions the term, “credit card”. It allows you to make large purchases and pay them back over time. They also often come with rewards programs like air miles and cashback.
Because it’s ‘unsecured’, credit card issuers won’t ask you to put down any collateral unlike other loans (such as auto loans or a mortgage). Since they don’t have any collateral, this usually means that you need to have a good credit score to qualify for an unsecured card.
Depending on your needs, you can find a range of unsecured credit cards that might suit you– from student cards for those in college, to chargeback cards that require the balance paid in full each month. Continue reading for a complete overview of unsecured credit cards and how they work.
What’s An Unsecured Credit Card?
An unsecured credit card allows you to make purchases without having any form of collateral, on the assumption you’ll pay off the balance at the end of a specific period– typically a month. The ‘unsecured’ part of the name simply means that the lender doesn’t ask for a down payment or make you put up property as collateral in return for getting access to money.
Unsecured credit cards frequently have a medium-to-high rate of interest– so if you make a large purchase and don’t pay it off by the end of the month, you can find yourself in debt quite quickly!
If you don’t have good credit or don’t have a credit record, you generally won’t be able to get an unsecured credit card. However, there are still other options available that will allow you to establish your credit and get on the financial ladder.
How Do Unsecured Credit Cards Work?
When you apply for an unsecured credit card, a lender checks your credit score and, depending on how good that score is, offers you a card with a particular limit, a particular interest rate, and particular features.
You’re then able to use the credit card to make purchases and can pay the balance at the end of the month. Any remaining balance after the end of the month will accrue interest, so if you can’t pay the entire balance, make sure you factor the interest into your budget!
Are Store Cards Unsecured?
There are a lot of different institutions which issue unsecured credit cards. Most are specific financial institutions, but a store card can also be a form of an unsecured credit card.
A store card is a type of unsecured credit card, which is typically administered by a credit broker.
The difference between most unsecured credit cards and store cards is that you can only use your store card in a very limited number of places.
Who Are Unsecured Credit Cards Best For?
If you have good credit, good budgeting skills, and a reasonable amount of savings, then an unsecured credit card is perfect for you. They’re also good for people with a steady income that covers all their expenses, but might not immediately cover a large purchase.
If you’re paid weekly but your large bills come monthly, then using a credit card can make it easy to cover those and pay back part of the balance with each paycheck.
Specific types of unsecured credit cards, like store cards, are also good for allowing you to collect small purchases and then pay them off in one go at the end of the month. If you are someone who spends regularly at a certain store, then having a credit card there can help you manage your purchases.
Finally, unsecured credit cards are also an ideal option for someone who has recurring payments which they might forget to pay; you can use your credit card to automatically make the payments each month, and then pay just one bill.
What Are The Requirements?
You’ll generally need a credit score of good to excellent (670-850) to qualify for the widest range of credit cards. The higher your score, the higher your credit limit will likely be and the best range of rewards will be available.
If your credit score is slightly lower (580-669), you might find your options aren’t quite as good. Lower than that, you either won’t qualify at all, or the cards on offer will have higher fees and fewer rewards.
The card issuer will check a few things other than your credit score as well, like:
- Income
- Employment status
- Your savings
- Monthly rent or mortgage payments
- Whether you have other credit cards
All this lets the issuer make an informed judgment on whether you’ll be able to pay back what you spend on a credit card.
The minimum age to get an unsecured credit card is 18. To qualify, an 18-year-old will need to prove they have an independent income, or they will need a co-signer who is over 21 and has good credit. A teenager as young as 16 can become an authorized user on an adult’s card.
And unsecured credit cards aren’t just for individuals. Couples and families can share a credit account, and businesses of all kinds can get an unsecured credit card– even if you’re a freelancer.
Pros & Cons Of Unsecured Cards
Pros
- Unsecured credit cards are very convenient. You can use one to:
- Buy things online
- Transfer money to others through apps like Venmo and PayPal
- Automatically pay bills
- Make purchases through brick-and-mortar stores
- Depending on the card, you can be rewarded for spending money. The level and type of reward varies, but things like air miles and getting cash back are common.
- Credit cards often come with insurance – both basic travel insurance, and insurance against fraud. If you pay for something that isn’t delivered as advertised, your issuer will often allow you to put through a chargeback to reclaim the money. If your credit card details are stolen, you won’t be on the hook for any charges- so long as you’ve been sensible with your card.
- Signing up for a credit card can come with its own benefits – like 0% interest on purchases for a period, or no fees for a year on a card with better rewards.
- Unsecured credit cards are accepted all over the world. While they might have currency conversion fees or other costs, you’ll still be able to make purchases while you’re traveling, or from online stores based outside the US.
Cons
- If you aren’t disciplined, an unsecured credit card can lead to getting into debt fast. Psychologically, putting something on a credit card doesn’t feel like handing over cash – so it becomes easier to spend more than you intended to.
- Interest rates stack up. Credit card issuers make the bulk of their money from charging interest on unpaid balances. While making the minimum payment might seem like a good way to hold off on having to pay back a lot of money, all you end up doing is making the problem worse.
- Those initial enticements like 0% interest or zero fees can end up costing a lot if you aren’t vigilant when the period comes to an end.
- If you don’t have much of a credit record, you might find the maximum limit on your credit card isn’t high enough to allow you to get the upsides you want, like the convenience of multiple automatic payments.
- If you share a credit account with someone, you might end up on the hook for their spending- even if you break up or they spend too much.
Alternatives To Unsecured Credit Cards
There are a few alternatives to unsecured credit cards, which allow you to access some of the benefits of using a credit card while avoiding certain downsides.
Secured Credit Cards
A secured credit card differs from an unsecured card in that it requires a security deposit, which the lender holds against your credit card. Your deposit and your card limit are usually the same.
Following that, you can then use the credit card, and pay it off every month. The lender doesn’t touch the security deposit and reports the payments to credit agencies, which is the same as with an unsecured credit card.
Almost anyone can get one since the lender takes on no risk. This makes them a very good tool for building up your credit score if you have no credit or bad credit. Think of them like a credit card with training wheels.
Unfortunately, their annual fees and interest rates are often higher than unsecured credit cards. Because you need a cash deposit, you might not be able to get a limit high enough to access some of the benefits of using a credit card.
Bank Debit Cards
A debit card is a card linked directly to your checking account. You use it to spend your own money without any hassle.
Debit cards can be used across a wide range of services like you can with a credit card, but you don’t need to specifically top up or pay off the card.
Bank debit cards come built-in with your checking account, meaning you need a bank account to get one.
Keep in mind that using a debit card doesn’t build up your credit score, however, you can earn cash back with some debit cards.
Prepaid Debit Cards
If you don’t have a bank account or want to easily manage your spending, a prepaid debit card is a good option. Prepaid debit cards allow you to load money onto a card, and then spend it in the same way as a bank debit card or a credit card.
Parents often use them to manage spending money for their kids, since you can’t spend more than you have.
Frequently Asked Questions
What is the difference between an unsecured credit card and a secured credit card?
An unsecured card doesn’t require a security deposit, which makes it harder to qualify for if you have poor credit. A secured card uses your security deposit as a credit card limit. This makes them easy to qualify for, but they often have higher fees and lower spending limits.
Do unsecured credit cards require a security deposit?
No. The clue is there in the name – unsecured means no security. Therefore, they tend to be limited to those with good credit.
Do unsecured credit cards help you build credit?
Yes. If you have a limited credit record, using an unsecured credit card can be a good way to build credit. However, you may only qualify for a credit card with a low credit limit and high fees. You’ll have to make sure that you’re vigilant about paying back the balance on time every month.
Is an unsecured credit card good?
It depends on what the card is and how you use it. If you’ve got solid budgeting skills, an unsecured credit card is a good way to make paying for things more convenient, and you get rewards for spending money.
It’s very important to make sure your card is with a reputable lender, otherwise, you might end up with an interest rate or card fees which are much higher than expected.
Unsecured credit cards can be risky if you’re in a risky financial position because if you can’t pay one month, the penalties stack up quickly. This includes if you lose your job, or if something else goes wrong.
Does an unsecured credit card have a limit?
An unsecured credit card will almost always have a limit. The two cases where it might not have one are:
- It is a business credit card.
- The person with the credit card is very wealthy.
If neither of these cases applies, and an issuer is offering you a card with no limit, read the fine print carefully!
What is the easiest unsecured card to get?
This depends on what you’re looking for and what you consider easy. Because of all the different factors that issuers consider, the easiest card will be different for everyone. If you’re looking for an easy card, in terms of not having to wait or fill in a lot of forms, you can look for “instant approval” credit cards.
If you want an unsecured credit card that’s easy to get because you’re in college, or you have very little credit history, then check out Student Cards or Starter Cards.
If you have poor credit, you might want to become an authorized user on someone else’s unsecured credit card to help build up your score. It’s worth spending time looking at a lot of different issuers and considering different options, particularly if you have poor credit.
While they might be very appealing, an unsecured credit card isn’t for everyone. Ultimately, the worst unsecured credit card is one you can’t afford.