What Is an Unsecured Credit Card?

At a time when credit card balances are on the rise and Americans are binging on debt, not having to put up collateral is an increasingly cherished option. This is where unsecured credit cards come in.  

In a nutshell, this type of card doesn’t require a security deposit for the money you borrow and offers a few additional perks. But to get approved, applicants generally need a decent credit score. The following guide breaks it all down. 

What an Unsecured Credit Card Means to An Average Consumer

Unlike secured credit cards, unsecured credit cards don’t require collateral. Instead, the bank, credit union, or another financial institution that offers this type of card requests your personal information, including details about your annual income. Furthermore, you’ll need to consent to a credit score check. The better the credit score, the better the offer. 

Most unsecured credit cards require a good to excellent credit score (670-850). Applicants who are eligible get lower interest rates and generous rewards. Some issuers offer cards for lower credit scores that sit in the 580-669 range, but the options become pretty limited once you dip below 580. 

Although unsecured cards for scores lower than that exist, the fees usually outweigh any benefits. In such cases, it is better to get a secured credit card dedicated to helping you rebuild your credit score with the possibility of upgrading to an unsecured one when you satisfy the issuer's requirements.

Differences Between Secured and Unsecured Credit Cards

The most significant difference between the two is that the latter doesn’t require a collateral deposit. Card issuers typically require a deposit from customers they consider a risk, which means anyone who doesn’t have a credit history or has a credit score below 670.

Of course, none of this means that having an unsecured credit card translates into a risk-free way to free money. If you fail to pay your credit card balance, creditors can try to collect by suing you or asking the court for permission to garnish your wages. They might send reports to credit bureaus and can send your account to a third-party debt collector, too.

It’s also worth noting that secured cards rarely comes with any rewards. Moreover, the interest rate is higher, and some cards have an annual fee. 

At this point, you might be wondering why anyone would use a secured credit card. It’s because these cards are a powerful tool for effectively rebuilding your credit score and developing healthy spending habits. Don’t forget, when you cancel your secured credit card, you get your collateral deposit back. 

How to Get an Unsecured Credit Card

Applicants with a credit score of 670 and above will get approved for an unsecured credit card by almost any financial institution. For them, the biggest issue is picking the right credit card. Others will have a harder time, but there are a few avenues to explore. 

One is to get a secured credit card and build or repair your credit score. This requires avoiding overspending and making regular and timely payments, which will improve your chances of getting an unsecured card down the road. Many card issuers offer an upgrade from a secured to an unsecured credit card, but the process can take several months.

Some financial institutions offer both a secured and an unsecured credit card to applicants who are looking to build up or repair their credit score. But in those instances, both cards come with annual fees and few to no rewards. 

Another route for those with a bad credit score is to become an authorized user on someone else’s account with good standing. The authorized user isn’t the primary account holder and isn’t responsible for making payments and, as such, doesn’t need the same credit score requirements.

This isn’t meant to be a loophole in the system. It is simply a way to build up your credit score until you become eligible for an unsecured credit card. Just make sure that the bank reports authorized user activity to the credit bureaus. 

Credit Card Rewards

Unsecured credit cards generally provide much better rewards. The rewards come in various forms, but most can be placed in one of three categories: miles, cash, and points. 

Travel Rewards

The more money you spend on traveling, the more frequent flier miles you get. The number of miles needed to secure rewards varies depending on the card. But the points and miles earned will typically enable you to reduce the cost of travel and add a few additional benefits, such as access to the airport lounge. 

Most credit card issuers won’t allow you to transfer miles between programs but will allow you to convert them. So, rather than focusing solely on the easiest card to get, make sure you review the selection of perks that are being offered.  

Cash Back

The term might be misleading since, in most cases, it doesn’t lead to cold, hard cash in your hand. But this reward program enables you to redeem a percentage of the money spent on eligible purchases. Some issuers will give you the option to choose the categories where you wish to earn cash back, including dining, gasoline purchases, and groceries.  

Business Card Rewards

Business credit cards typically offer generous rewards in the form of sign-up bonuses, cash back on daily purchases, and even expense tracking features. Some rewards programs cover everything from frequent flier miles to gift cards. In addition, most of these cards don’t come with annual or foreign transaction fees. 

Pros and Cons Summarized

Before you pull the trigger on an unsecured card, it’s important to outline and weigh their pros and cons. 

Pros  

• Few or no fees: Most unsecured credit cards don’t have high fees and offer fantastic rewards. On the other hand, applicants with lower credit scores may have to pay more fees and are unlikely to get most of the rewards options. 
• Rewards: Most cards come with well-rounded benefits and rewards programs that are unmatched by secured credit cards. Issuers offer more rewards to applicants with good or excellent credit scores. 
• Lower interest rates: With unsecured cards, customers are approved to spend a certain amount of money during each billing cycle. Those who pay off their balance in full and on time aren’t charged any interest. But even if you carry the balance, the interest rates are reasonable as long as you have a good credit score. 
• No collateral deposit: Your credit limit is based on your credit score, and you don’t have to put up collateral to get approved. 

Cons

• Harder to get approved: Your eligibility for an unsecured card is determined by your credit score and credit history. As such, getting approved may be harder for those with lower credit scores, especially if they wish to enjoy some of the benefits. 
• Easier to overspend: This goes for all credit cards. Credit cards don't mean you have free money. Anything spent needs to be paid back. Your credit score tells the card issuer whether you’re capable of regularly covering your balance.