What is an unsecured credit card and how does it work?
When you compare credit cards, you may see them grouped into 2 categories: secured and unsecured. When you think of a typical credit card, you might be thinking of an unsecured card.
But how do unsecured credit cards work? How do they differ from secured credit cards? And how do you know which is right for you?
Key takeaways
- Most credit cards are unsecured, meaning they don’t require a security deposit to access a credit line.
- Unsecured credit cards may come with higher credit limits and lower interest rates compared with secured credit cards, but they function the same way.
- Like a secured credit card, an unsecured card can be a useful tool for building credit when used responsibly.
- Having good or excellent credit scores might make it easier to qualify for an unsecured card with better terms.
How does an unsecured credit card work?
Unsecured credit cards have revolving credit lines that are open-ended. That means you can use the line of credit and pay it down repeatedly as long as the account is open and in good standing.
The credit limit associated with a credit card is the maximum amount of credit extended to you. As you use the card, the amount of credit you have available goes down. You can make purchases up to that limit. As you repay what you’ve spent each billing cycle, your credit is restored. Any unpaid balance will carry over to the next billing cycle and accrue interest. But paying off your statement balance or more than the minimum can reduce interest charges.
Some unsecured cards come with an annual fee. Before you apply, it may help to weigh any perks and benefits that come with the card against the annual fee.
What’s the difference between a secured and an unsecured credit card?
The major difference between secured and unsecured cards is that secured cards typically require a security deposit. The deposit acts as collateral to back the credit account. It may help to think of the security deposit required for a card as similar to the security deposit required to rent an apartment.
Benefits of unsecured credit cards
Unsecured credit cards typically offer a number of benefits to cardholders, including:
- Approval without a security deposit: A person’s credit scores and credit history help determine whether they qualify for an unsecured card.
- Range of options: There’s an unsecured credit card for many types of needs, from student cards to travel rewards cards.
- Rewards: Rewards are a major benefit of many unsecured cards. Some allow you to earn cash back on every purchase. And some travel rewards can be redeemed for recent travel purchases. Some secured credit cards may also offer rewards.
Drawbacks of unsecured credit cards
Unsecured credit cards can have some disadvantages, including:
- More rigorous approval process: Since there’s no deposit required on an unsecured card, lenders may have tougher requirements for approving an application. Even so, people with poor credit may have some options for getting an unsecured card.
- Potential for higher balances: No matter what type of card you have, it’s important to use it responsibly. Because unsecured cards tend to have higher credit limits, it may help to have a repayment plan in place for paying off your card each month.
What to consider before applying for an unsecured credit card
Before you apply for an unsecured credit card, you might want to consider the following:
1. Your credit scores
Understanding and monitoring your credit can be a useful way to stay on top of your financial health. With CreditWise from Capital One, you can access your TransUnion® credit report and VantageScore® 3.0 credit score as often as you like without hurting your score.
CreditWise is also free and available to everyone, even if you’re not a Capital One customer. You can also get free copies of your credit reports from each of the three major credit bureaus: Experian®, Equifax® and TransUnion®. Visit AnnualCreditReport.com to learn how.
Pre-approval or pre-qualification can be another way to help you find the right card. You can find out whether you’re pre-approved for a Capital One credit card before you even apply. It’s quick and requires only some basic information—and it won’t affect your credit scores.
2. Credit card terms and features
Comparing credit card terms, conditions and features can help you find a card that meets your needs. Keep an eye out for things like:
- Rewards: Looking to make the most of your spending? A rewards credit card allows you to earn things like cash back or miles when you make purchases. Ways to earn and redeem rewards can vary from card to card, so take a look at the fine print before you apply.
- APR: A credit card’s annual percentage rate (APR) is typically the same as its interest rate. A lower APR can reduce the overall cost of a revolving balance. And some cards may feature a promotional APR as low as 0%. Keep in mind that different kinds of transactions can have different APRs. For example, interest on cash advances is usually higher than the interest on regular purchases.
- Fees: Even if you don’t carry a balance on your card from month to month, you could still owe fees. Some common charges to check for may include annual fees, balance transfer fees, foreign transaction fees or late fees.
3. Your repayment plan
Consider how you plan to repay your credit card balance, especially when the unexpected happens. For example, you may be committed to paying your card off in full each month. But if unforeseen expenses come up, you may end up carrying a balance into the next billing cycle.
Having a plan for making on-time payments is something you could build into a monthly budget. You can also learn more about responsible credit card use and ways to budget with a credit card.
Unsecured credit card FAQ
Still have questions about unsecured credit cards? Here are answers to some frequently asked questions:
Are credit cards unsecured debt?
Most credit cards are a form of unsecured debt. That’s because they don’t require any collateral to open an account. Secured credit cards require a security deposit.
Will unsecured credit cards hurt my credit?
Both secured and unsecured credit cards could have an impact on your credit, depending on how you use them. With responsible use, secured and unsecured credit cards could help you build your credit. But missing payments and overspending could have the opposite effect.
There’s another thing to keep in mind: Applying for any kind of credit card could temporarily cause your credit scores to drop. That’s because applying requires a hard credit check—sometimes called a hard pull or hard inquiry. Unlike soft credit checks, hard credit checks will appear on your credit reports.
What credit score do I need for an unsecured credit card?
Consumers with higher credit scores may have more options for unsecured credit cards than those with lower credit scores do. But it depends on the person and the credit card.
Take a closer look at how credit score ranges could affect eligibility for unsecured cards:
- Good or excellent credit scores: Some unsecured cards are only available to people who have good credit scores, which credit-scoring company FICO® says range from 670 to 739. Good scores from VantageScore may be between 661 and 780. But it’s important to remember that lending decisions are ultimately up to the credit card issuers, not the credit-scoring companies.
- Fair credit scores: Unsecured cards may also be available to people who have fair credit. Fair credit scores can vary based on credit-scoring models and the credit-scoring companies that calculate them. For example, FICO scores that are generally considered fair can range from 580 to 669. And VantageScore’s fair range might fall between 601 and 660.
- Poor credit scores: You may have options for an unsecured credit card, even if your credit is considered poor—although they might be limited. But with responsible use of your card, you can work to improve your credit scores.
What are some alternatives to unsecured credit cards?
Even if you don’t qualify for an unsecured credit card right now, you may still have options:
- Consider a secured credit card. A secured credit card can be a tool for rebuilding credit or establishing credit. You’ll be required to make a security deposit that secures the account. Once you’ve been approved for a secured credit card and made your deposit, you can use the card like you’d use an unsecured card. And with responsible use, you may eventually be able to upgrade to an unsecured credit card.
- Become an authorized user. Being an authorized user allows you to access the credit card account of another person. There’s generally no credit check or application involved to become an authorized user. Experian credit bureau explains how becoming an authorized user could help you build or rebuild your credit: “Ideally, the account is added to your credit report and the primary cardholder’s good credit management helps you improve your creditworthiness.”
Unsecured credit cards in a nutshell
An unsecured credit card can offer access to a flexible line of credit. It may also come with benefits like cash back or travel rewards that can help you make the most of your purchases.
But before you apply for an unsecured card, it can help to understand its terms and conditions, plus any possible fees. If you’re ready to apply, Capital One’s pre-approval tool can help you determine which cards may be the best fit for you—without hurting your credit.