Most people aren’t familiar with the term but likely have one or two in their wallets. An unsecured credit card is one that does not require any security deposit for approval. Once you’re approved for the card, you get a particular spending limit and can increase that limit at various times throughout the life of the card. When most people talk about a credit card, they’re talking about an unsecured one.
Differences Between a Secured and Unsecured Credit Card
Unsecured cards aren’t difficult to find and most of the credit cards available today are unsecured. To tell the difference between the two, a secured card is always going to have the word ‘secure’ in its name. That being said, there are plenty of significant differences between these two card types.
With an unsecured card, the issuer doesn’t require a security deposit. This deposit is there in case you do not pay the bill; the issuer can take that deposit and not refund it to cover the amount of your bill. Because there’s no deposit, the creditor must use other methods to collect the debt if you don’t pay. These include reporting the delinquency to the credit bureaus, sending your account to a third-party collection agency, taking you to court, or asking the court to garnish your wages.
On the other hand, a secured card does require a deposit for collateral. Therefore, the issuer can take the deposit amount to cover any debts incurred that you don’t pay back promptly. The deposit was necessary because you are considered a high credit risk. It’s also likely that you are going to be charged fees and won’t get extra benefits.
Why Unsecured Cards Are Preferred
Most people prefer unsecured credit cards because they don’t have to put any money down upfront to use the card. While these cards do have some legal hazards if you neglect to pay the bill each month or pay the card off, it is still preferable because then you keep more of your money and can use the credit for large purchases or for backup on those weeks where you don’t make much money. Regardless of why you want a card, an unsecured one is the best option because it usually has lower interest rates (APR) and better terms. Plus, many of them offer a rewards program, which helps you earn money back or lets you earn points/swag.
Qualifying for an Unsecured Card
If you currently have bad or no credit, or you’ve filed for bankruptcy recently, it’s likely that you’re going to have a tough time getting approved for an unsecured card. Many creditors see that credit history as a high risk. They may believe that you’re not in a position to repay the borrowed amount, even if you plan to and desire to. Therefore, you may need to start out with a secured card to get back on the credit track so that you can qualify for an unsecured card later when you’ve built up a positive credit history.
During that time, make sure you do not miss any payments on your credit card and make all other payments necessary. You should also plan to keep the secured card for at least six months and use it sparingly. It’s important to use some of the credit so that you establish the credit card on your history report, but you shouldn’t overspend. If possible, pay off the entire debt you incur each month to develop a better history. Many times, creditors offer both products, including unsecured and secured credit cards; when you’ve made enough payments and established creditworthiness, the creditor is likely to switch you to an unsecured credit card.