Understanding unsecured credit cards: pros and cons
When it comes to credit cards, there are two main varieties – secured and unsecured. Before shopping around for a new card, it’s important to know the difference between them.
But what exactly is an unsecured credit card? How does it differ from a secured one? Let’s explore these questions and more below.
What is an unsecured credit card and how does it work?
An unsecured credit card is a type of card that does not require collateral from the borrower to secure the loan.
This means that to obtain an unsecured credit card, you do not have to put up any assets, such as property or savings, as a guarantee for repayment if you fail to make payments on time.
Instead, these cards are based solely on your creditworthiness and ability to repay the loan.
Advantages
See what the main benefits of getting this type of credit card are.
No collateral
One key advantage of an unsecured credit card is that you don’t have to worry about losing anything if you default on your payments.
They don’t require anything as collateral, so you can apply just by using your score.
Rewards
Furthermore, many banks will offer incentives such as cashback, or credit card rewards in points programs for customers who choose their unsecured cards over other cards.
Convenience
Finally, they offer discounts, and online management tools, so you don’t have to go to a branch every time.
In addition, they are accepted everywhere in America, and you also can use them to shop online in your favorite stores.
Disadvantages
We all know everything has some disadvantages. So, read below the main ones you can find when getting an unsecured credit card.
Harder to qualify
For one thing, unsecured cards are harder to qualify for. They usually require high credit scores since the lenders want to know if you are reliable to pay back.
Difficult to control expenses
Since unsecured cards are backed with many rewards, such as cash back, points, and miles, you may be willing to spend more to achieve them.
Also, these credit cards usually have a higher credit limit and discounts at some partner stores.
So, you’d better be careful with your spending.
Fees and rates
Here is a closer look at some of the most common unsecured card fees:
1. Annual Fee
An annual fee is a fee charged once per year for using an unsecured credit card. This fee can vary depending on the issuer and the individual card.
2. APR
APR stands for Annual Percentage Rate, the interest rate charged on unsecured credit card purchases and cash advances.
The APR will vary depending on the issuer, but it is typically between 20% and 30%.
3. Late Payments Fee
A late payment fee is charged when a cardholder fails to make a minimum payment by the due date. This fee can be $10 or $35, but it can vary depending on the issuer.
4. Foreign Transaction Fee
A foreign transaction fee is a fee for any purchase made in a foreign currency. This fee is typically around 3%, but it also can vary depending on the issuer.
5. Cash Advance Fee
Finally, a cash advance fee is a fee that is charged when a cardholder takes out a cash advance from their unsecured credit card.
What is the difference between a secured and unsecured credit card
A secured credit card is a type of credit card where the cardholder deposits money with the credit card company, which then becomes the credit limit for the card.
On the other hand, an unsecured credit card does not require a deposit and is based solely on the applicant’s credit history and score.
A secured credit card is a good option for someone trying to build or rebuild their credit history, as it allows them to demonstrate that they can use and repay debt responsibly.
An unsecured credit card may be a better option for someone with a good credit history, as it typically has a higher limit and offers better rewards.
What credit score do you need to apply for an unsecured credit card?
The credit score you need to apply for an unsecured credit card varies depending on the lender. However, you generally need a good to excellent credit score to be approved.
This is because unsecured credit cards are typically offered to borrowers who are considered low-risk and have a history of using credit responsibly.
If you need more clarification about your credit score, you can get a free credit report from Experian every year.
It will give you an idea of where your credit stands and what areas you may need to work on before applying for an unsecured card.
If your credit score is lower than you’d like, don’t worry – there are still plenty of secured cards available that can help.
Should you get an unsecured credit card?
It depends on your financial situation. An unsecured credit card is a type of credit card that doesn’t require a security deposit to open the account.
If you’re in good financial shape and have a history of responsible spending, getting an unsecured credit card can be a good way to build your credit score.
It shows lenders that you can borrow money and repay it on time.
However, getting an unsecured credit card can be dangerous if you’re not in good financial shape or have a history of irresponsible spending.
So, you could end up accumulating a lot of debt that you can’t afford to pay back. So before applying for an unsecured card.
Alternatives to unsecured cards
There are a few alternatives to unsecured cards that you should consider.
1. Secured card
One option is to get a secured credit card. This card type requires you to put down a deposit as your credit limit.
2. Prepaid debit card
Another option is to get a prepaid debit card.
With this type of card, you load money onto the card in advance and then use it to make purchases or withdraw cash.
3. Regular debit card
Finally, consider using a regular debit card instead of a credit card.
Debit cards are linked directly to your bank account, so you can only spend what you have.
While unsecured cards can offer convenience and flexibility, other options may better suit your needs.
Interesting Related Article: “When is the Right Age to Get a Credit Card?“
