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. 

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. 

• 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.

An unsecured card is a type of credit card that doesn’t require a security deposit to open an account. They’re called unsecured cards because they don’t require collateral to back or “secure” the account. 

Consumers with higher credit scores may have more options for unsecured credit cards with better terms than those with lower credit scores do. But it depends on the person and the credit card. 

Here are a few more things to know about unsecured credit cards:

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 available credit is restored.

Some unsecured cards come with an annual fee. Before you apply, it may help to weigh any rewards 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.

You can use unsecured credit cards to make purchases in person and online. As you make purchases with your card, your available credit will go down. Then, as you pay off your balance, your available credit will go back up.

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.

Consumers with higher credit scores may have more options for unsecured credit cards than those with lower credit scores do. 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. FICO® says good credit scores range from 670 to 739. And good or prime 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 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 or near-prime 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 those options might be limited. But with responsible use of a credit card, you can work to improve your credit scores over time.

Unsecured credit cards typically offer a number of cardholder benefits. Here are a few examples:

• No security deposit: Unlike secured cards, an unsecured credit card doesn’t require a security deposit to open an account.

• Variety: There are unsecured credit cards for many types of needs, from student cards to travel rewards cards.

• Rewards and benefits: You may be able to earn higher rewards with some unsecured cards than you would with other types of credit.

• Terms: Unsecured credit cards may offer better terms, such as higher credit limits, than secured credit cards do.

Unsecured credit cards can have some potential disadvantages. 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.

Like all credit, unsecured credit card debt can be good or bad. No matter what type of debt you have, it’s important to use it responsibly by doing things like paying your bills on time each month. Doing so can make debt a positive and allow you to use it to build credit.

Whether an unsecured credit card is right for you depends on your financial situation and goals. Here are a few examples of who might be a good fit for an unsecured credit card: 

• People with good credit: If you have good to excellent credit, you may qualify for an unsecured credit card that offers rewards. A rewards card can help you get the most out of spending you’d be doing anyway. And there are many different types of rewards cards to choose from. If you want to earn rewards on everyday purchases, for example, a cash back credit card could be a good option.  

• Frequent travelers: Some unsecured credit cards offer travel-focused rewards. Travel rewards cards let you earn points or miles that you can typically redeem for travel-related expenses.

• Business owners: Business credit cards can help business owners earn rewards for business spending, keep track of expenses and establish a business credit score. Business cards may also offer benefits tailored to business owners. 

These are just some examples of who might consider an unsecured credit card. Credit cards can also be great tools for establishing and building credit, budgeting, and covering unexpected expenses.

Before you apply for an unsecured credit card, you might want to consider the following:

The higher your credit scores, the better your odds of getting approved may be. 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 credit report and 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. You can also get free copies of your credit reports by visiting AnnualCreditReport.com.

Pre-approval or pre-qualification can also help you find the right card.

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, points or miles for making purchases with the card. 

• Annual percentage rate (APR): A credit card’s 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 APR on cash advances is usually higher than the APR on regular purchases. 

• Promotional APRs: Some cards may offer a low introductory 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.

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.

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:

You have to put down a one-time, refundable 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.

Being an authorized user allows you to access the credit card account of another trusted 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. And if the authorized user or the account holder doesn’t use the card responsibly, it can hurt both people’s credit.

Still have questions about unsecured credit cards? Here are answers to some frequently asked questions:

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, you can compare Capital One credit cards.

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 with responsible use and earn rewards.

• Monitor your credit score with CreditWise from Capital One. It won’t hurt your credit, and it’s free for everyone.