What is an unsecured credit card, and how does it work?
When you imagine a typical credit card, you might be thinking of an unsecured credit card. An unsecured card is a type of credit card that doesn’t require a security deposit to open an account.
Find out how unsecured credit cards work, how they differ from secured credit cards and what to consider before applying.
What you’ll learn:
- 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 to 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 may 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.
An unsecured card also has a credit limit, which is the maximum amount of money you can borrow on the card. You can make purchases up to that limit. As you use the card, the amount of available credit you have goes down. Then, as you repay what you’ve spent, your credit is restored.
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. It’s important to review all card terms, including interest rates and other fees, before applying too.
What’s the difference between a secured and an unsecured credit card?
The major difference between a secured and an unsecured card is that a secured card requires a security deposit to open the account. That deposit is typically refundable and acts as collateral to back the credit account. It might help to think of it like the security deposit required to rent an apartment.
Benefits of unsecured credit cards
Unsecured credit cards typically offer a number of cardholder benefits. Here are a few:
- An unsecured credit card doesn’t require a security deposit to open an account.
- There are unsecured credit cards for many types of needs, from student cards to travel rewards cards.
- You may be able to earn higher rewards with an unsecured card than you would with a secured card. Plus, an unsecured card may offer more perks and benefits.
- Unsecured credit cards may offer better terms, such as lower interest rates and higher credit limits, than secured credit cards.
Drawbacks of unsecured credit cards
Unsecured credit cards can have some potential disadvantages, including:
- If you’re new to credit, it may be tougher to be approved for an unsecured credit card. If that’s the case, a secured card might be a better option. Depending on the issuer, you might eventually be able to upgrade to an unsecured card.
- No matter what type of card you have, it’s important to use it responsibly. Because unsecured cards tend to have higher credit limits, there’s the possibility of racking up higher balances. It may help to make a plan for how you’ll pay 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 and approval odds
The higher your credit scores, the better your odds of getting approved may be. 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 free for everyone, even if you’re not a Capital One customer.
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 Capital One card offers before you apply.
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: A rewards credit card lets you earn cash back or miles for making purchases with the card. Ways to earn and redeem rewards can vary, 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 carrying a balance. Keep in mind that different transactions can have different APRs. For example, the interest on cash advances is usually higher than the interest on regular purchases. Some cards may also offer a low promotional APR that applies to certain kinds of transactions, such as balance transfers and purchases, for a limited time.
- Fees: Even if you don’t carry a balance on your card from month to month, you could still owe fees. Some common fees to check for include annual fees, balance transfer fees, foreign transaction fees and late fees.
3. Your repayment plan
Consider how you plan to repay your credit card balance. Any unpaid balance will carry over to the next billing cycle and may accrue interest. Paying off your credit card balance in full each billing cycle can help you avoid interest charges. If you can’t pay the entire balance, paying more than the minimum can help reduce interest charges.
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. Here are two tools that may help you establish and build credit with responsible use so you can increase your odds of qualifying for an unsecured credit card in the future.
Secured credit cards
You have to put down a one-time security deposit to open a secured credit card account. Once you’ve been approved 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 and get your security deposit back.
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. If both the account holder and the authorized user use the card responsibly, it may help build both people’s credit. But it depends on the credit card issuer’s policies and the credit bureaus’ policies about how activity is reported and recorded.
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. But secured credit cards require a security deposit, making them a type of secured debt.
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, unsecured credit cards could help you build your credit. But missing payments and overspending could have the opposite effect.
Here’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 for credit 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 and may impact your scores.
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 and above. A good credit score from FICO® ranges from 670 to 739. And good scores from VantageScore may be between 661 and 780. But remember that lending decisions are 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 the credit-scoring model. For example, a fair FICO score 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 a credit card, you can work to improve your credit scores over time.
Key takeaways: Unsecured credit cards
An unsecured credit card doesn’t require a security deposit and offers access to a revolving line of credit. It may come with benefits like cash back or travel rewards that can help you make the most of your purchases. Having a higher credit score can make it easier to qualify for an unsecured card with better terms. But there may still be unsecured card options for people with fair and building credit.
If you’re ready to explore card offers, Capital One’s pre-approval tool can help you determine which cards may be the best fit for you without hurting your credit.
Explore more from Capital One
Are you new to credit or searching for your next credit card? Capital One can help:
- Check for pre-approval offers with no risk to your credit scores.
- Earn unlimited 1.5% cash back on every purchase, every day with Quicksilver or other cash back rewards cards.
- Explore credit cards you can use to build credit responsibly and earn rewards.
- Monitor your credit score with CreditWise from Capital One. It won’t hurt your credit, and it’s free for everyone.
