Price protection, extra warranties, rewards points, and free short-term financing are some of the benefits you get when using a credit card. Most of those benefits are only available with unsecured credit cards though.
What is an unsecured credit card? Let’s take a look.
Secured vs Unsecured Credit Cards
There are two types of credit cards available – secured and unsecured. You’ll see other options like debit Visa and MasterCard or prepaid cards but those aren’t the same thing. They don’t report to the credit bureaus and are not any different than paying cash.
A secured credit card requires collateral that the lender can take if you don’t pay off the balance when it is due. This is almost always in the form of a security deposit. When you sign up for the card, you’ll transfer a certain amount of money to the credit card company and that money gets held in an account for you.
Your “credit” limit is usually equal to the amount of the deposit. If you send them $1000, that’s how much you can spend on the credit card. At the end of the month, you pay off the balance owing and start over but if you don’t pay it off, the credit card company can take it from your deposit.
Unsecured credit cards, on the other hand, don’t need a deposit or any kind of collateral. The credit card company checks your credit history and if you have a good enough score, they assume the risk of lending you whatever you charge to your card.
What is an Unsecured Credit Card’s Advantage?
Unsecured credit cards have several advantages over secured cards, making them some of the best credit card options available. Some of the features include:
- Lower annual fees
- Lower interest rates
- Rewards points
- No cash needs to be tied up
Lower Annual Fees
Most secured credit cards have high annual fees, usually with no added benefits. The majority of people who use secured cards do so because they either have a low credit score or not enough credit history to qualify for an unsecured card.
Also, remember that these annual fees are charged immediately when you take out the card, and again on an annual basis. Much like a same day loan, the fees are there as soon as you start, even if you don’t use the card or pay back your card immediately.
The credit card companies know this and charge higher fees because they can get away with it. You have a lot more options when choosing an unsecured card so they have to be more competitive. Some cards still have an annual fee but generally, you get extra benefits in return like better rewards or purchase protection options.
Lower Interest Rates
Along the same lines as higher fees, secured cards often have higher interest rates. Again, the credit card companies have you over a barrel and can get away with charging these higher rates. They won’t be as high as payday loans but they’re still relatively high.
Because of the extra competition with unsecured credit cards, the companies have to offer better deals to get people to sign up. Their interest rates will be in the range of 16.99% – 26.99%, making them competitive with installment loans if you have a good credit score.
Rewards points are rare with secured cards but you have many options to choose from with unsecured cards. You can get travel points, cash rebates, store-specific deals, and many other bonuses.
The secret is to choose your rewards card based on things you’ll use. If you never travel, there’s no point in having a travel rewards card, for example.
No Cash Needs to be Tied Up
With an unsecured credit card, none of your cash gets tied up as collateral. Most cards give you at least a three-week “grace” period to pay your balance with no interest added. This gives you free use of the money in the meantime.
With a secured credit card, your deposit is locked in as long as you have the card. You’ll get it back if you cancel the card, assuming the balance is zero, but that money won’t be accessible for anything else in the meantime.
Will You Qualify for an Unsecured Credit Card?
If you’re looking for a new credit card, the best option is an unsecured card. The catch is, will you qualify?
That will depend on your credit history and credit score. If you have a history of making payments on time, have never defaulted on any previous credit cards or loans, and have never declared bankruptcy, you’re likely to qualify.
On the other hand, if you have a spotty credit history or little-to-no credit history at all, it will be more of a challenge.
Your credit score, or FICO score, will give you a pretty good idea of whether you’ll qualify. The score indicates your credit level:
- Above 800: Excellent credit
- 740 to 799: Very good credit
- 670 to 739: Good credit
- 580 to 669: Fair credit
- Below 580: Bad credit
If your score is below 580, you likely won’t qualify for an unsecured credit card. As you move up through the various levels from there, you’ll qualify for more cards with better rewards, lower interest rates, and lower annual fees.
If you don’t know what your credit score looks like, you can order a free credit report from each of the three major credit reporting agencies. This will show everything that’s on your credit history and if any negative items are incorrect, you can request to have them removed.
How to Find the Best Unsecured Credit Cards
If your credit score is high enough that you’ll likely qualify for unsecured credit, make sure you shop around to find the best card for your needs. An annual fee might make sense if you get enough benefit in return. A higher interest rate won’t matter if you plan to pay the balance off every month.
What is an unsecured credit card you should consider? Bonsai Finance can help. We list all the best credit cards on our website. Select a few details about what you’re looking for and we’ll tell you which card you should apply for.
You can also look through our blog to find the best articles about personal loans no credit check, bad credit loans, and guaranteed loans. Don’t hesitate to search for what you need in our “resources” section. Check out these articles below that you might find interesting: