When most people hear the words “credit card,” unsecured cards are usually what comes to mind. More common than their secured cousins, unsecured cards play a big part in many people’s monthly budgets and
credit scores — for better or worse.
But what is an unsecured credit card, exactly, and are you ready to apply for one? Here’s a guide to the perks and drawbacks to help you decide if
secured or unsecured credit is the better choice for reaching your financial goals.
What’s an unsecured credit card?
Unsecured credit cards let you make purchases today that you’ll pay for later. You don’t have to give the bank any type of collateral to reassure them that you’ll pay the debt — you just have to meet some requirements that help the lender figure out how likely you are to repay.
The requirements in question are factors like your credit score, income, and financial history. You might still get approved without a strong credit score, but you’ll probably pay higher interest rates and fees than more creditworthy applicants. Getting an unsecured card could still be worth it, and if you use it responsibly, it could even help you build credit.
Secured vs. unsecured credit cards
Your current situation and future financial goals play a big part in which type of credit works for you.
How do secured credit cards work compared to unsecured ones? Let’s take a quick look at the key differences.
Eligibility and collateral requirements
Unsecured cards don’t require collateral. They’re not secured by anything but a promise to repay. But secured credit cards require you to provide a security deposit. The deposit you put down as collateral is usually the same as your credit limit, and it acts as a safety net for the card issuer.
Interest rates and fees
Unsecured credit cards often come with lower fees for those with strong credit. But if you qualify with a lower score, you often pay for it with a higher interest rate. This means if you carry a balance every month, you have to pay more interest.
You might assume a secured card will have a lower interest rate since it’s secured with a cash deposit, but that’s not always true. The average annual percentage rate (APR) for a secured credit card
is about 25%, which isn’t too far off from unsecured options.
Use cases
If you’re new to credit or recovering from past financial challenges, secured cards are a good starting point because they usually don’t require a high credit score. But if you have a solid history and want access to higher credit limits, cashback rewards, or travel perks, an unsecured card may be a better choice.
How unsecured credit cards work
Revolving credit line and credit limits
When you get approved for an unsecured credit card, the card issuer assigns you a credit limit based on your creditworthiness, income, and debt-to-income ratio (how much you owe on your debts versus how much you earn).
Your credit limit is the most you can borrow at any given time, but as you pay down your balance, more credit opens up to you. That’s why these cards are considered
revolving credit.
Billing cycles and payments
Unsecured credit cards have monthly billing cycles. At the end of each cycle, you get a statement detailing your purchases, the minimum payment due that month, and the total balance. Avoid interest by paying the full balance by the due date. If you only make the minimum payment, interest begins to accrue on the remaining balance.
Interest accumulation
The credit card company charges interest on any outstanding balance left on your card after the due date — the exact amount depends on the card’s APR.
Low-interest credit cards do exist, but even those typically start with APRs around 16% or more, so it’s smart to pay the full balance if you can.
Approval factors
While the only thing “securing” an unsecured credit card is your promise to repay, the bank needs some signs that they should trust that promise. It considers your income, credit score, and the length of your credit history. The stronger those factors are, the better your odds of getting approved.
Additional fees and perks
Both unsecured and secured credit cards offer perks like fraud protection, which you might not enjoy if you shop
with a debit card. Some even offer travel benefits and
cashback rewards.
Credit cards also often come with annual fees. Nearly all of them will charge you a late payment penalty if you miss the due date, and if the card offers perks or a
balance transfer option, read the fine print to see if you’ll get charged an annual fee or balance transfer fee.
The benefits and drawbacks of unsecured credit cards
Pros
Cons
Harder to qualify without a security deposit
Higher likelihood of overspending for cardholders with poor money management skills
Lower credit limits and higher APRs on unsecured credit cards for bad credit
What to know before applying for an unsecured credit card
Ready to apply for an unsecured credit card? This guide will walk you through the process — but first, follow these steps to help improve your approval odds.
1. Build or improve your credit score
Pay bills on time to establish a solid payment history. Keep your credit utilization (how much of your available credit you’re currently using) low — ideally below 30% of your total limit. It’s also a good idea to regularly check your credit report for errors. If you spot a mistake, submit a dispute with the credit bureaus.
2. Manage your existing debt
Pay down outstanding balances to lower your debt-to-income ratio, and avoid opening multiple credit cards in a short time period. Whenever possible, make at least the minimum payment on time to avoid hurting your credit score.
3. Review your financial history
Check your credit score to see where you stand before applying for any credit card. Make sure you’re financially ready to pay a monthly bill, because late payments add up. Most credit card issuers do a hard credit check, so avoid applying for multiple credit cards at one time.
Frequently asked questions
Can I get an unsecured credit card with no credit history?
You can, but your options may be limited. Some lenders offer unsecured cards designed for beginners, but they usually have higher interest rates and lower credit limits. While having a co-signer could improve your odds, a secured credit card could be a
better way to build credit if you can swing the deposit.
Can my unsecured credit card limit increase over time?
If you’ve maintained a low balance and a history of on-time payments, you can usually ask the lender for a credit limit increase after a few months. Some card issuers even provide automatic increases to cardholders who manage their credit well.
What happens if I miss a payment on an unsecured credit card?
You might get charged a late fee, and you’ll owe interest on the unpaid balance. Paying more than 30 days late or missing multiple payments could hurt your credit score.
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An unsecured credit card can
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Credit Monitoring tool can help you monitor your credit report
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Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out.
Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0.
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