What Are Unsecured Credit Cards?

Credit cards come in a variety of forms and serve a range of purposes. You may have heard of secured credit cards, which many people use to build credit. But what exactly is an unsecured credit card, and how does it work?

Key Takeaways

• Most consumer credit cards are unsecured
• Unsecured cards don’t require a security deposit
• Qualifying for an unsecured card usually requires a positive credit history
• Making timely payments on a credit card can help build credit
• A higher credit score usually means higher credit limits and lower interest rates

What Are Unsecured Credit Cards?

When you think of a credit card, you’re probably thinking of an unsecured credit card first and foremost. The majority of consumer credit cards are unsecured, which means you don’t need to provide collateral or a deposit in order to get approved for one. Your positive credit history is its own proof that you know how to properly manage credit and will pay your bills on time.

Unsecured credit cards are also called traditional credit cards. Consumers who can’t qualify for an unsecured card can usually get a secured credit card in the meantime.

The Difference Between Secured and Unsecured Credit Cards

There’s one major difference between an unsecured credit card and a secured card. And that’s the security deposit required as collateral on a secured card.

• Unsecured credit cards are riskier for creditors, so they’re typically harder to get than secured cards. If you have a good credit score, you’ve already proven that you can be trusted, so creditors are usually willing to take that risk.
• Secured credit cards allow you to establish positive payment habits if you have a poor credit score, or even no credit score. You put down a deposit, which is usually equal to the credit line. So if you provide a $300 deposit as collateral to get a secured card, your credit line will likely be $300 as well.

If you only qualify for a secured credit card, it’s because your credit history shows you may be likely to default on an unsecured card, or because you haven’t established enough of a credit history yet. This is often the case for young adults or recent immigrants to the country, since your credit history doesn’t follow you across borders.

However, once you’ve used a secured credit card for a few months to a few years and established a pattern of paying on time, you can often graduate from secured card to unsecured. At that point you’ll get your deposit back — sometimes with interest.

How Unsecured Credit Cards Work

When you’re approved for an unsecured credit card, you’re given a credit limit and a list of terms and conditions. Your interest rate, annual fee, late fee, and other potential charges are shown up front, along with whether or not you have a grace period on new purchases.

You can charge purchases to the card, up to your credit limit. However, keeping your credit utilization ratio below 30% is recommended if you want to have a good credit score. And maxing out the card is never a good idea.

When you use your credit card to make purchases, those amounts are applied to your balance. Then you need to make payments of at least the minimum before your due date in order to keep your account in good standing. If you pay the minimum on time but don’t pay off your balance in full each month, you can avoid late fees and dings on your credit report — but you’ll still be charged interest on the remaining balance.

What Are the Interest Rates for Unsecured Credit Cards?

Credit card interest rates are typically variable, which means they can change with overall economic conditions and the federal funds rate (aka Fed rate). As a result, the average credit card interest rates increased substantially in the decade from 2013 to 2023, going from just under 13% to almost 23%.

If the Federal Reserve cuts the Fed rate, credit card interest rates won’t necessarily follow suit immediately. But regardless of the range at any given time, having a higher credit score usually translates to a lower interest rate, and vice versa.

How to Apply for an Unsecured Credit Card

Lots of credit cards exist, and many of them have rewards structures that appeal to consumers with specific interests and spending habits. Some cards are for students, some are focused on travel, and others offer rewards on everyday purchases like gas and groceries. So, the first step is to research card options that fit your interests, buying patterns, and credit score.

Next, it’s a good idea to see if you pre-qualify before applying for any unsecured credit card. That allows you to estimate your chances of approval without triggering a hard inquiry on your credit report.

Finally, if you find a card you like and you pre-qualify for it, you can submit an application. Filling it out online is the easiest way, and most issuers can give you a decision within a few minutes. Just enter your personal information, including name, address, date of birth, Social Security number, employment information, and annual income. The creditor will run a credit check before either approving or declining your application.

Benefits and Disadvantages of Unsecured Credit Cards

Like anything in life, unsecured credit cards have pros and cons.

Benefits of unsecured credit cards

• The credit line allows you to conveniently make purchases now and pay them off later.
• You don’t need to pay a security deposit or offer collateral before opening an account.
• Different credit cards offer rewards and benefits to align with individual needs and interests.
• Unsecured credit cards often come with better rewards and benefits than any other type of payment card.
• Unsecured credit cards may offer higher credit limits and lower interest rates than secured credit cards.

Disadvantages of unsecured credit cards

• Applying for a card is a hard pull on your credit report.
• It’s more difficult to qualify for a higher credit limit and lower interest rates if you don’t have a solid credit history.
• It’s easy to rack up your balance and end up buried in debt if you don’t have a plan for systematically paying it down.
• If you miss a payment or pay late, you’ll be charged late fees and see a negative line item on your credit report.

What Are the Alternatives To Unsecured Credit Cards?

Some things can’t be purchased with cash or check. When you need to pay with plastic, you have four common options besides unsecured credit cards.

• Secured credit cards are the most obvious alternative to a traditional credit card. Many people who don’t qualify for a traditional unsecured card will use a secured card to build credit first.
• Debit cards look like credit cards, but they don’t offer you any type of credit. All debit cards require some type of linked bank account, and your purchases are “debited” from that account. So, you need to already have the money available when you use a debit card to make a payment.
• Prepaid cards are like debit cards that aren’t linked to an external account. Instead, you load money directly onto the card in advance and can spend up to the amount that you have on the card before loading it again.
• Gift cards are similar to prepaid cards but often can’t be reloaded — so once you’ve used up the balance, it’s done. Some gift cards are only for specific merchants, while others allow you to make purchases anywhere credit cards are accepted.

All of these payment cards function very much like an unsecured credit card at the point of purchase, but debit cards, prepaid cards and gift cards may require a PIN. Only secured credit cards are processed exactly like unsecured credit cards, while also allowing you to build your credit history in the same way.

Bottom Line

If you don’t have an unsecured credit card, it might seem like the holy grail of financial products. But unsecured credit cards have some pros and cons, so you need to consider whether getting one is the right move for you.

Once you decide you’re ready to apply for an unsecured credit card, it’s important to choose one that fits your needs and credit score. Credit One Bank offers a range of cards for different stages of the financial journey, and you can quickly and easily see if you pre-qualify.