What is an unsecured credit card, and how does it work?
July 27, 2023 9 min read
When comparing credit cards, you may see cards grouped into two categories: secured and unsecured. But don’t let the terms throw you. When you think of a typical credit card, you’re probably thinking of an unsecured card.
But what does “unsecured” really mean? How does it differ from a secured credit card? And how do you know which one is right for you?
- Most credit cards are unsecured, meaning they don’t require collateral, such as 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.
- 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, such as higher credit limits and lower interest rates.
What is an unsecured credit card?
What’s the difference between a secured and an unsecured credit card?
In most cases, the main difference between a secured and an unsecured credit card is that a secured card requires a security deposit. The security deposit acts as collateral to back the credit account. It might help to think of it like the deposit required to rent an apartment.
How do unsecured credit cards work
Like all credit cards, unsecured credit cards have revolving credit lines. A revolving credit line is open-ended, which means it doesn’t have an end date. 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. So you can make purchases up to that credit limit. Then, you’ll be required to make at least the minimum payments by the payment deadline each billing cycle.
If you pay only the minimum during a billing cycle, the unpaid portion will carry over to the next billing cycle on your card account and accrue interest. But paying more than the minimum can help reduce the amount of interest you owe each month. And paying your balance in full means you may not owe any interest on new purchases.
Some unsecured cards have annual fees. Before you apply for a card with an annual fee, it might help to figure out whether you’ll use enough perks or benefits to make the fee worth it. Or consider a similar card that doesn’t have an annual fee.
Benefits of unsecured credit cards
Unsecured credit cards may come with a few benefits, including:
- Higher credit limits: Applicants with good or excellent credit scores may be more likely to qualify for higher credit limits. That’s because issuers often set credit limits based on applicants’ creditworthiness.
- Promotional interest rates: Credit card interest rates and the cards you might qualify for can vary based on your credit scores. Still, unsecured credit cards may come with lower rates compared with secured cards. And some unsecured credit cards may even offer a low or 0% introductory annual percentage rate (APR).
- Additional benefits or rewards: Some credit cards may also give you the opportunity to earn travel rewards or cash back when you use the card.
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. It can also provide valuable information about the types of credit cards you could qualify for.
Not sure how to check your credit scores? CreditWise from Capital One lets you access your TransUnion® credit report and VantageScore® 3.0 credit score without hurting your credit.
CreditWise is also free and available to everyone, whether or not you’re 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 the best card for you. Keep an eye out for things like:
- Rewards: Looking to make the most of your spending? A rewards credit card can let you earn things like cash back or miles. But rewards and ways to earn them can vary from card to card, so take a look at the fine print to find out the specifics for each card.
- APR: A credit card’s APR is typically the same as its interest rate. A lower APR can reduce the overall cost of a revolving balance. 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: Take a look at any credit card fees that may apply—even if you don’t carry a balance from month to month. Some common charges may include annual fees, balance transfer fees, foreign transaction fees or late fees.
3. Your repayment plan
Take some time to consider how you plan to repay your credit card balance. You may get a credit card and plan to pay it off in full each month. But unexpected expenses come up, and you may find that you need to carry a balance over into the next billing cycle.
With that in mind, it can be helpful to have a repayment plan before you ever make a purchase. It’s 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 FAQs
Still have questions about unsecured credit cards? Read on for answers to some frequently asked questions.
Are credit cards unsecured debt?
Most credit cards are unsecured. That’s because they don’t require any collateral, like a security deposit, to open an account. Secured credit cards require collateral.
Will unsecured credit cards hurt my credit?
Both secured and unsecured credit cards could have a negative—or positive—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 too: Applying for any kind of credit card could temporarily cause your credit scores to drop. That’s because they require a hard credit inquiry—sometimes called a hard pull or hard check. Unlike soft inquiries, hard credit checks will appear on your credit reports.
What credit score do I need for an unsecured credit card?
Many different factors determine whether you qualify for an unsecured credit card. Your credit reports and credit scores are a couple of those factors. That’s because your credit history gives lenders insight into your credit activity and current credit situation—and may indicate how likely you are to repay any debts. So consumers with higher credit scores may find that they have more options for unsecured credit cards than do those with lower credit scores.
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 what might be considered fair credit. Fair credit scores can vary based on credit-scoring models and the credit-scoring companies that calculate them. FICO scores that are considered fair usually range from 580 to 669. And VantageScore’s fair range might fall between 601 and 660.
- Poor credit scores: Don’t fret if your credit is considered poor—there still may be credit cards that fit your needs. And with responsible use, you can use them to improve your credit scores. Just be aware that your options may be more limited.
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 great option for rebuilding credit or establishing credit for the first time. Your security deposit “secures” the account and may also become the card’s credit limit. Once you’ve been approved for a secured credit card and made your deposit, you can use the card just like a traditional 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 another person’s credit account to make purchases. And if the credit card issuer reports authorized users to the credit bureaus, both the authorized user and primary account holder’s credit could be impacted by how responsibly the account is managed. Plus, there’s generally no credit check or need to apply in order to become an authorized user.
Unsecured credit cards in a nutshell
An unsecured credit card can offer access to a flexible line of credit. It may even come with benefits like cash back or travel rewards that can help you make the most of your money.
But before you apply, it can help to understand your card’s terms and conditions, along with any fees that could apply. And 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.