Unsecured Credit Cards: Everything You Need to Know

What is an unsecured credit card?

An unsecured credit card is a type of credit card that offers a line of credit without the need for collateral, or a security deposit. These differ from their uptight cousins, secured credit cards, which demand a pound of your flesh as collateral (just kidding, it’s usually a cash deposit). Unsecured credit card is issued solely based on your creditworthiness, which includes factors like your credit score, credit history, income, and debt-to-income ratio.

How do unsecured credit cards work?

Unsecured credit cards have revolving lines of credit, which means there’s no end date. You can use the line of credit (and repay it) over and over as long as the account remains open and in good standing.

Once you’re approved for an unsecured credit card, you’ll be assigned a credit limit based on your creditworthiness and how likely you are to repay the line of credit. The credit limit for a credit card is how much credit is extended to you. You can make purchases up to that credit limit, then you’ll have to make at least the minimum payments by the payment deadline every billing cycle.

Note if you only make a minimum payment, or don’t repay the entire balance in full, the unpaid portion will carry over to the next billing cycle and start accruing interest. Paying as much as you can, or paying the card off completely each billing cycle, will:

• Help you avoid interest.
• Help you avoid any penalties and fees.
• Keep your credit utilization ratio down, which is good for your credit score.
• Give you access to more credit.

Unsecured credit cards typically have rewards, like cash back, points, or miles, that you earn by using the card. You can then redeem these for a variety of things like statement credits, gift cards, checks direct deposits, and more.

Most unsecured cards also come with a variety of benefits and perks available to the cardholder for simply having and using the card.

Related: How Do Credit Cards Work?

Pros and cons of unsecured credit cards

Most credit cards out there are unsecured, but there are both pros and cons to having one:

Pros

Some of the advantages of an unsecured credit card include:

1. No deposit required: To get a secured credit card, you must provide an initial deposit as collateral. Your credit limit on the card is based on your deposit, and as your credit improves and you use the card responsibly, you may be able to earn your deposit back.

On the other hand, unsecured cards don’t require collateral, or a deposit, to get approved. Your credit limit is based on your credit score, history, income, and other factors.

2. Better rewards and perks: Unsecured cards often offer cash back, points, or miles as rewards for using the card to make purchases. They also come with additional benefits and perks such as:

• Extended warranty
• Purchase protection
• Roadside assistance
• Rental car insurance
• Trip cancelation/interruption insurance
• Baggage insurance
• Access to airport lounges
• Free TSAPrecheck or Global Entry

You’ll also find that many unsecured cards have lucrative introductory offers to attract applicants, such as a sign-up or welcome bonus or the option of a 0% intro APR for purchases and/or balance transfers.

Secured credit cards don’t usually offer rewards or additional perks. The primary purpose of the card is to help you improve your credit score.

3. Lower fees: You will likely have few if any, fees to deal with. Some unsecured cards have an annual fee and others may have foreign transaction fees, but you can find cards that waive both of these fees.

4. Build credit history: An unsecured card can be valuable for building your credit history if you:

• Make payments on time.
• Keep your balance low.

Most unsecured cards report to the major credit bureaus (Experian, TransUnion, and Equifax) so your credit behavior will be reflected in your credit report and credit score. This helps you establish a positive credit history that will help you obtain other types of credit, such as another credit card or loan, and get better interest rates and terms.

5. Higher credit limits: Applicants with good or excellent credit may be more likely to qualify for higher credit limits with an unsecured credit card (since your credit limit is based on your creditworthiness). Most cardholders also have the opportunity to automatically qualify for credit limit increases over time.

With a secured card, your credit limit is based on your deposit and they are typically low, usually starting at $200.

Cons

Unsecured credit cards have a lot of benefits, but there are also some downsides:

1. Difficult to get approval: Most unsecured credit cards require you to have good to excellent credit (at least 670 or above) to qualify. If you don’t have good credit or any credit history at all, you may have a more difficult time qualifying for one. You’ll also need to show proof of steady income and a lower debt-to-income ratio so that the card issuer feels confident you’ll be able to repay the credit you borrow.

2. Can spend beyond your means: Unsecured cards offer more spending power for the cardholder. Your credit limit could be thousands of dollars, making it tempting to overspend. This can lead to high amounts of credit card debt and make it difficult to make your monthly payments. Because balances that carry over from month to month accrue interest, this can make the debt even more overwhelming.

If you have an unsecured card, it’s important to set a budget for your credit card expenses and have a repayment plan. Only use your card for purchases you can afford to pay off in full each month.

3. High interest rates: Unsecured credit cards have lower interest rates than secured cards, but the rates are typically much higher than other types of credit like personal loans. If you carry a balance each month, the interest charges can add up quickly. Having an excellent credit score will likely get you a lower interest rate, but you should try to repay your balance every month to avoid the interest charges altogether.

Factors to consider for unsecured credit cards

Before applying for an unsecured credit card, consider the following:

1. Credit score

Knowing and regularly monitoring your credit score can be a good way to keep track of your financial health. It also provides information about the types of credit cards you could qualify for. Unsecured credit cards typically require a good to excellent score (670+) to qualify, so knowing your score before applying can help you avoid being denied a card.

You can also check your credit score for free through most credit card and banking sites or mobile apps, such as CreditWise from Capital One. You can also get a free copy of your credit reports from each of the three credit bureaus at AnnualCreditReport.com.

Before applying for a credit card, you can also get pre-approved or pre-qualified. These are free ways (that don’t impact your credit) to learn the likelihood of getting approved for a credit card.

2. Credit card terms and features

There are dozens of unsecured credit cards on the market, each offering different rewards, features, and terms. Comparing terms can help you find the best card for you. Research features like:

• Rewards: Cards may offer cash back, points, or miles. They may have a flat rate, bonus, or rotating bonus spending categories. Find a card with rewards that align with your spending.

• APR: Check the APR range for the card, which is typically the same as the interest rate for credit cards. The lower the APR you can qualify for, the better. Note that different kinds of transactions, like purchases, balance transfers, and cash advances, have different APRs.

• Fees: Look at any fees that may apply, such as annual fees, balance transfer fees, foreign transaction fees, late fees, and others.

• Benefits and perks: Weigh the other perks the card offers, especially if the card has an annual fee. Make sure the benefits are ones you can take advantage of and outweigh any annual fee.

3. Repayment plan

We know that any balance carried from month to month will accrue interest charges, which could quickly lead to overwhelming credit card debt. Before applying for a card, take time to consider how you’ll repay your balance each month. It may be helpful to create a repayment plan before you ever make a purchase, such as building a monthly budget.

How to qualify for an unsecured credit card?

• You’ll typically need good to excellent credit to qualify for unsecured credit cards, especially those with the best rewards and the lowest interest rate.
• Experts recommend keeping your debt-to-income (DTI) ratio, which is how much money you earn vs. what you spend, below 43% (though 35% or less is considered good).
• Issuers want to know (and see proof) that you have a steady, reliable income that will allow you to repay what you borrow.

Credit score required for an unsecured credit card

Your credit score will determine whether or not your application for an unsecured card will be approved or denied. It will also broaden or limit your options for cards, including the fees, perks, and rewards you have access to.

1. Excellent credit score

Lenders are more willing to extend credit without collateral when they have confidence in the borrower’s ability to repay debt. The credit score needed for excellent credit for an unsecured credit card is typically 740 or higher. However, some credit card issuers may have higher or lower credit score requirements. For example, some issuers may require a credit score of 760 or higher for their top-tier unsecured credit cards, while others may be willing to approve applicants with credit scores as low as 700. Excellent credit signifies a history of on-time payments, low credit utilization, and a reliable income, which reduces the lender’s risk.

2. Good credit score

You’ll typically need good to excellent credit (670+) to qualify for an unsecured card with the best rewards and the lowest interest rate. Remember, the higher your credit score, the more options you’ll have.

3. Fair credit score

Fair credit, or “average” credit, is roughly 630+. There are several unsecured credit cards built for consumers with fair credit, though not as many offer rewards or other perks.

Compare: Best Credit Cards for Fair Credit

4. Bad credit score

While it’s possible to get an unsecured card if you have bad or poor credit (629 and below), they aren’t typically recommended. These cards often have high fees and small credit lines, and they don’t typically offer rewards and other benefits. Instead, consider a secured card that will help you build credit to a place where you can qualify for a better-unsecured card.

Note that if you have no credit history at all, there are some unsecured credit cards out there built to help you build credit. Instead of focusing on credit scores and credit reports, they will look at your income, occupation, bank account balances, and more. For example, there are credit cards available to students to help them build credit.

Do unsecured credit cards build credit?

Unsecured credit cards can help you build credit in a couple of primary ways:

• Making payments on time will help improve your credit since your payment history makes up 35% of your score.

• Keeping the balance low will improve your credit utilization ratio (30%).

• Keeping the account active and in good standing can help increase the average age of credit (10%).

• Having revolving credit will add to your credit mix (10%).

Why should someone get an unsecured credit card?

If you have poor credit or no credit at all, you should consider a secured credit card or other alternative.

However, if you have good to excellent credit and qualify for an unsecured card, you may want to consider doing so because you’ll find:

• More lucrative rewards.
• Additional benefits and perks.
• Fewer fees.
• Higher credit limits.

Other types of people who may want to consider an unsecured card include:

• If you’re already conscious about the amount of money you spend each month, an unsecured card can help you maximize your purchases with rewards.
• Those who travel regularly, as travel rewards cards can help you earn miles and points to offset the cost of trips and include additional travel perks.

Alternatives to unsecured credit cards

If you’re looking for credit but an unsecured credit card might not be the best option for you, there are some alternatives that you can look into:

1. Debit card: You use a debit card in the same way you would a credit card, to make purchases online or in person. However, a debit card is issued by your bank and the money you spend comes directly out of your checking account.

2. Secured credit card: A secured credit card is a type of credit card that requires a cash deposit, usually equal to your credit limit, to be made when you open the account. This deposit acts as collateral each time you make a purchase. Over time, you may qualify to upgrade to a secured card.

3. Personal loan: A personal loan is money you borrow from a bank or financial institution with a fixed interest rate, set repayment period, and consistent monthly payments. Amounts range from $1,000 to $100,000, and interest rates and fees can be lower depending on your creditworthiness. You can use personal loan funds for just about anything.

4. Short-term loan: Short-term loans, such as payday loans and car title loans, have short terms (sometimes as little as a couple weeks), low loan amounts (typically $500), and high APR (as high as 400% or more). While not generally recommended, they can be fast and easy to get should you need cash fast.

5. Peer-to-peer loan: P2P loans allow you to get a loan directly from other individuals, cutting out the bank or financial institution as the middleman. Investors can work directly with people seeking loans. Depending on your credit, you may qualify for competitive rates and higher loan amounts.

Another option 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 since they aren’t responsible for making the payments, but you can reap the benefits of positive and responsible card activity on your credit score. You can have access to the card and build credit, but you should choose a primary cardholder you trust who has responsible credit habits.

FAQs