What Is an Unsecured Credit Card?

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When it comes to credit cards, you have two options: secured and unsecured credit cards. Depending on your situation, one might be better for you than the other. If you’re looking to build or rebuild your credit history, a secured credit card might be the best option. Most credit cards, however, are unsecured credit cards. They typically offer more benefits with lower interest rates and annual fees. Unsecured credit cards also don’t require a cash security deposit to open an account.

Before applying for your next credit card, learn the pros and cons of secured and unsecured credit. Establishing a healthy credit history and credit score may give you opportunities to improve your financial standing and increase your wealth opportunities.

What Is an Unsecured Credit Card?

An unsecured credit card is one that’s not secured by collateral, meaning it doesn’t require a cash deposit to open an account. A range of credit card options are available with varying terms, interest rates, and reward programs. With unsecured credit cards, there is no collateral for the card issuer to take.

Most credit cards are unsecured. Whether you have a good credit score or want to improve your credit score, you can still apply for unsecured credit cards. Approval is ultimately decided by the card issuer and you’ll be informed as to whether or not you’ve been accepted. Before applying, make sure you’re aware of the card’s terms, fees, benefits, and interest rates. Many unsecured credit cards may be able to help you to build or improve your credit standing, but you’ll need to be able to pay off purchases by the payment deadlines.

Many people prefer unsecured credit cards because the interest rates and annual fees tend to be less than with secured credit cards. They may also include great reward programs. For every dollar you spend, you can earn a certain number of reward points that can be used to purchase gift cards, airline tickets, hotel stays, and more. Other reward systems are cash back programs where you can earn a dollar amount, such as 1% or 2% cash back on everything you buy. Overall, unsecured credit cards are a convenient way to pay for items and services without having the cash on-hand.

What is a Secured Credit Card?

A secured credit card is an issued payment card that requires a cash deposit as collateral in case the cardholder defaults on payments. For instance, if you place $1,000 cash in the new secured credit account, you’ll likely be able to charge up to $1,000 on that credit card. Some credit lenders may allow you to extend your credit limit beyond your security payment without additional deposits.

The cash deposit ensures that the card issuer is backed by some type of security. For this reason, secured credit cards are often issued to those with low credit scores or limited credit history. If you’re bouncing back after a job loss or applying for your first credit card, a secured credit card might be a reasonable option for obtaining credit and building your history. When you agree to provide collateral, a credit card issuer feels safe to offer you a line of credit, knowing they have a secure payment should you not be able to pay. If you become delinquent on paying a secured credit card balance, it’s likely to harm your credit score. If you make timely payments, it may help build your credit history over time.

With a secured credit card, you may have to pay an annual fee. There will also be an APR (annual percentage rate) which dictates the amount of interest you’ll pay if you don’t pay your statement in full every month. Secured credit cards typically have higher annual fees and interest rates than normal unsecured credit cards, so it’s best to try to limit the time you have a secured card. If you’re building or rebuilding your credit, do your best to make full payments on-time. With a strong payment history, you may be more likely to be approved for an unsecured credit card.

Unsecured Vs. Secured Credit Cards

So, what is the difference between secured and unsecured credit cards? There are a few key distinctions. Being aware of the main differences will help you choose the right type of card for your financial situation.

Simply put, secured credit cards require an upfront cash payment as collateral when you open the account. Unsecured credit cards don’t require collateral. For approval of either type of card, the issuer reviews your financial history, including your credit score, to determine if you’ll be able to make payments.

Here’s a quick comparison of secured and unsecured credit cards, check out the chart below.

Unsecured Credit Cards: 

  • Don’t require a cash deposit as collateral
  • Lower interest rates than secured cards
  • Usually requires a positive credit history
  • Possible annual fee
  • Often has higher credit limits — anywhere from $500 to $15,000 and beyond
  • Usually offers reward programs (point systems or cash back)
  • Lender doesn’t have ability to seize additional cash if you default on payments
  • May build and strengthen your credit history and score
  • When a cardholder fails to make payments on-time, they’re subject to late fees, interest rates, and having their account sent to collections

Secured Credit Cards: 

  • Requires a cash deposit as collateral
  • Higher interest rates than unsecured cards
  • Usually granted to those with low credit scores or limited credit history
  • Possible annual fee (typically higher than unsecured cards)
  • Often has lower credit limits, such as $500 or $1,000
  • May offer reward programs (point systems or cash back)
  • Lender has ability to seize the cash deposit should the cardholder default on payments
  • May build and strengthen your credit history and score
  • When a cardholder fails to make payments on-time, they’re subject to late fees, interest rates, having their account sent to collections, and seizure of the money in the secured account

Overall, unsecured credit cards provide lower interest rates and better terms for cardholders. They also tend to offer more lucrative reward programs and don’t require collateral. For those with limited credit history or low credit score, a secured loan may be the best opportunity to build credit and eventually transition to an unsecured credit card.

With credit cards often being required to book airline tickets, reserve seats at a show, or buy items online, having an unsecured credit card can make life a whole lot easier. Being responsible with your payments and avoiding late fees and interest rates may help strengthen your credit history. If you’re not careful with your payments and fail to make them on time, your credit history could suffer.

By continuing to build your credit and increase your score — through unsecured credit cards and other methods — you improve your overall financial standing. Smart decisions about your budget and credit put you on the path to a life of wealth and prosperity.

Sources: Bankrate | Investopedia | SmartAsset | The Balance | U.S. News

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