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When you’re trying to establish your credit profile, or improve your existing one, you will likely come across two basic choices among credit cards - secured and unsecured. A secured credit card means you have to put up some sort of collateral or deposit for use of the card. But when answering the question “What is an unsecured credit card?” you should know it’s a card that does not require any collateral or deposit for use. When most people think of using a card, it’s typically the unsecured credit card they’re most familiar with.
- Do you know what your credit profile includes?
- Research how an unsecured credit card can be a financial tool for your budget.
- Explore unsecured credit card options. Which one could help you?
What is an unsecured credit card?
As mentioned, an unsecured credit card is a card where the credit card company doesn't have a security deposit they can take if you don't pay your credit card balance. With a secured option, the amount of credit a borrower is extended depends on the amount of a security deposit put down. With an unsecured credit card, the credit limit is based on the borrower’s creditworthiness and profile.
Because there is no deposit required it may lead you to believe the creditor doesn’t have much recourse if you fail to make payments. However, the complete opposite is true. Because there is no security deposit to take hold of, the creditor has to use collection efforts if you fail to make a payment.
How Unsecured Credit Cards Work
When a creditor issues an unsecured credit card to a borrower, it makes the decision based on the credit score and profile of the borrower. Applying for an unsecured credit card gives the creditor access to information contained in the profiles with Experian, Equifax, and TransUnion. The creditor reviews this information, makes a lending decision based on this, and then determines the amount of the credit line if credit is extended.
The application process for an unsecured credit card is pretty straightforward. Typically you must provide a few personal details for the credit card company. The most important information is your name and social security number, address, and income. Once you provide this information, the credit card company will use it to make a decision for approval.
There are a wide variety of choices for unsecured credit cards on the market. Many of them specialize in certain categories, such as for travel or business. For example, consider the popular Capital One series of unsecured credit cards. There are several different cards that fall under the Capital One umbrella, each one specializing in certain types of consumers. The Capital One QuicksilverOne offers unlimited 1.5% cash back for everyday spending and purchases, while the Venture card offers travel rewards for every dollar spent.
Pros and Cons of an Unsecured Credit Card
Using an unsecured credit card provides you with plenty of benefits as a consumer — but you should understand the risk before committing to using one.
Pros of an unsecured credit card:
- Does not require a security deposit for collateral
- Possible lower interest rates versus traditional personal loans or lines of credit
- Rewards programs, such as cash back or travel incentives
- Few (or avoidable) fees
- Proper use can have a positive impact on your credit score
- Extra benefits, such as purchase protection or travel insurance
Cons of an unsecured credit card:
- Approval is based on your creditworthiness
- Hard Inquiry on your credit score which could affect your overall score.
- Late payments or too high usage amount may have a negative impact on your credit profile
- Easier to spend beyond your means and increase your debt
What is the difference between an unsecured credit card and a secured card?
Unlike unsecured credit cards, secured credit cards require you to pay a security deposit as collateral against the credit line offered. You’re basically funding the use of a secured credit card, whereas an unsecured credit option is based on your creditworthiness.
|Unsecured credit card||Secured credit card|
|No collateral required||Require a security deposit as collateral|
|Minimum credit score and credit history required for approval||Typically best for people establishing credit or with poor credit history|
|Many include additional card benefits||Limited benefits|
|Many offer travel and rewards programs||Rarely offer rewards programs|
What is an Unsecured Credit Card Used for?
Besides using an unsecured credit card for purchases, it could be used as a tool to improve your own credit rating. This happens in two ways. First, every month your payment history is reported by the credit card company to the three credit bureaus. A positive payment history is one of the biggest factors contributing to your credit score.
Secondly, an unsecured credit card goes towards your credit utilization percentage within your credit report. This percentage is the amount of credit you’re extended versus the amount you actually owe, thus your utilization. The less you “max out” your credit lines, the better it is for your credit score.
Unsecured Credit Card Qualifications
It’s important to note your credit reports and credit scores influence your application and the approval process for a card. Some unsecured cards are only available to people who have good credit scores and almost all have minimum credit scores they will consider. If you have a higher credit score, you could qualify for higher credit limits or lower interest rates, which is another example of how making smart decisions with your credit ends up saving you money over time.
Most of us know the concept of an unsecured credit card, but may not realize the impact it has on our own credit profile or what it takes to get one. Before using one, make sure you fully understand the difference between an unsecured credit card and a secure credit card and how it can be used as a financial tool.