Credit cards are pretty standard fixtures in modern-day life. When people talk about credit cards, they are most often referring to unsecured credit cards, meaning you don’t have to put up any collateral, such as a deposit, to get approved.
Unsecured credit cards are the most common cards available. Individuals who do not have strong credit histories, or none at all, may have a difficult time qualifying for one. Unlike secured credit cards, unsecured cards aren’t connected to a deposit put down as collateral, so the credit limit is determined by the cardholder’s credit.
Let’s take a look at how an unsecured credit card works, the pros and cons, and who qualifies for one.
- What is an unsecured credit card?
- Pros and cons of an unsecured credit card
- Who should get an unsecured card?
- What credit score do you need to apply for an unsecured card?
- Alternatives to unsecured credit cards
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 pay off, or make payments on, each month. Your eligibility and credit limit for an unsecured credit card are based on the issuer’s determination of whether you’ll be able to make appropriate payments on any balances you have on your card.
When you apply for an unsecured credit card, the credit card issuer will use your personal information, such as annual income, along with your credit score to determine your eligibility. Because unsecured credit cards aren’t backed by any kind of deposit like a secured card is, your card issuer won’t have access to funds to handle any unpaid debt you have on your account. This is why issuers consider a number of factors to determine the likelihood you’ll be able to pay off the charges you put on your card before they approve an application.
Pros and cons of an unsecured credit card
Using an unsecured credit card can have a variety of advantages. 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. It is a pretty sure bet that you will be able to find an unsecured credit card that will help you achieve your spending goals.
Here are a few benefits to consider:
Pros of an unsecured credit card
- Does not require a deposit for collateral. Your credit limit is based on creditworthiness.
- Lower interest rates and better rewards programs. While it depends on the card, unsecured credit cards can have lower interest rates and more lucrative rewards. Many unsecured credit cards offer some very nice introductory offers to attract applicants, giving opportunities to earn bonus miles, points and cash back. And in addition to that, you may also have the option of a 0 percent APR period, meaning you can make interest-free purchases during an introductory period before the regular APR kicks in.
- Few (or avoidable) fees. Another advantage of an unsecured credit card is that you will likely have fewer fees to deal with. 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 cons to consider.
Cons of an unsecured credit card
- Harder to get approval. Unsecured credit cards require a good credit score and credit history. If you don’t have good credit or any credit history at all, you may have a difficult time qualifying for one.
- Easier to spend beyond your means. While unsecured credit cards are riskier for lenders because they are not secured by collateral, they also provide risk for the cardholder—more spending power. Your credit limit can be thousands of dollars or it can be just a few hundred; 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 can’t manage to do that, interest will begin to add up and you may find yourself in a sticky situation.
Who should get an unsecured credit card?
If you have bad credit or no credit history at all, you may have a hard time getting approved for an unsecured credit card. Credit cards are not a one-size-fits-all type of situation, so it is important to consider options that will actually benefit you in the long run. Here are a few examples of different types of consumers who may (or should) consider unsecured credit cards:
- The budgeter: If you are already conscious about the money you spend each month, odds are you have a strong credit history. It may also mean one big mistake led you to create stronger habits. Either way, you are in a position where an unsecured credit card can help you to earn cash back on everyday purchases. Footing the bill for a massive family grocery haul you embark on once or twice a month doesn’t have to be an errand you dread. You have the opportunity to earn a fixed percentage on eligible purchases or opt for tiered categories tailored to areas you find yourself spending a lot on each month such as groceries, dining and entertainment or even gas.
- The frequent flyer: If you travel often for business or you are simply a jet setter who enjoys trotting around the globe, a travel rewards credit card can help you earn miles and points to help offset the cost of travel. Many travel cards come with a hefty price tag annually, but they are also known for generous sign-up bonuses and luxury perks such as airport lounge access. The typical baseline credit score requirement for a travel card is good to excellent (670-850), which could make it difficult to qualify for if you fall below 670.
- The business owner: Business credit cards are designed to help companies benefit from everyday spending. You do not have to own a storefront to qualify; freelancers can take advantage of generous rewards programs and expense tracking, too. Business credit cards are typically well-rounded, offering great rewards rates, no foreign transaction fees, no annual fees and juicy sign-up bonuses. These rewards and benefits vary from card to card, but there are a lot of solid cards on the market ranging from no-hassle cash back rates for startups to more luxurious travel perks for individuals who find themselves on the go a lot for business. Much like the travel rewards cards, business credit cards typically require a credit score in the good to excellent (670-850) range to qualify.
What credit score do you need to apply for an unsecured card?
An unsecured credit card uses your credit score to help determine if you are capable of handling credit and payments responsibly. The stronger your credit score, the more options you will have for unsecured credit cards. Most unsecured credit cards require credit in the good to excellent range (670-850). This range is where you’ll become eligible for many different kinds of rewards cards. You can also find some cards that will accept a score in the fair to good range (580-669). Once your score dips below 580, your options become much more limited. While you can still find unsecured cards, you will likely have to pay more fees and likely won’t get the same kinds of rewards options.
Alternatives to unsecured credit cards
If your credit score is on the lower end of the scoring range, you have a higher chance of getting a credit card if you apply for one that allows for a lower credit score.
Another way to get an unsecured credit card with a bad credit score is to become an authorized user on someone else’s account. Authorized users don’t have to meet the same credit score qualifications as primary cardholders because they aren’t responsible for making payments on the credit card account. Despite not having any legal responsibility for paying on the credit card they are authorized to use, authorized users can reap the benefits of card activity on their credit scores. You just have to make sure that the card issuer includes authorized users in their reporting. So, as an authorized user, you can have access to a credit card and build up your credit score at the same time.
One final thing you can do to get an unsecured credit card with a bad credit score is simply to work to improve your credit score. One way to do that is by applying for a secured credit card. Using a secured credit card for small purchases and paying your balance in full each month is a great way to establish a reliable payment history and increase your credit score. Another thing you can do to increase your credit score is to sign up for Experian Boost. Experian Boost is a free program that gives you the ability to include your regular payments for things like your cellphone and your rent into your payment history on your credit report.
The bottom line
Unsecured credit cards have few cons that make them unappealing to the everyday consumer, hence why we could only come up with 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 provide well-rounded benefits and rewards to appeal to almost anyone. If you are new to the credit card game and you don’t quite qualify yet, it is not the end of the world. A secured credit card can help you build your credit score while learning what your longtime financial goals may be. Who knows, maybe you will graduate to an unsecured card way ahead of schedule simply by creating strong habits and sticking to them.