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Best Unsecured Credit Cards
- Who Should Get an Unsecured Credit Card?
- Pros and Cons of an Unsecured Credit Card
- How Does an Unsecured Credit Card Work?
- Secured Credit Card vs. Unsecured Credit Card
- What to Consider When Applying for an Unsecured Credit Card?
If you’re thinking about applying for a new credit card, an unsecured credit card might be your number one choice. These cards aren’t secured by a deposit or collateral, which is unlike an auto or mortgage loan which is secured by a car or a house, respectively.
Since an unsecured credit card isn’t tied to the property, the bank issuing your credit card can’t seize your personal property if you default on payments. For this matter, some unsecured credit cards aren’t available to people with a low credit score. If you’re thinking about applying for one, here’s what you need to know about these particular credit cards.
Who Should Get an Unsecured Credit Card?
Although many banks offer unsecured credit cards, some issuing banks prefer applicants who have the highest credit scores. Not to say you can’t get an unsecured credit card with bad credit. You will, however, need to shop around to find banks that will extend credit accounts to people with no credit or bad credit.
Here’s a look at six reasons to consider an unsecured credit card.
- Build a credit history. An unsecured credit card is an excellent tool for establishing or rebuilding your credit history. A credit history can help you qualify for mortgages and auto loans, and it can help you get low-cost financing. To build a credit history with an unsecured credit card, make sure you apply to a bank that reports credit activity to the credit bureaus on a regular basis. You should also manage the account responsibly by paying your bills on time and not maxing out your card.
- You already have good credit. It’s much easier to get an unsecured credit card when you already have a good credit score. Before applying for an account, check your credit report and order your credit score. As you shop around for a card, read credit applications carefully and look specifically for information regarding minimum credit score requirements to qualify for a card. Since these requirements vary by card, look for cards designed for your credit range.
- You’re looking to earn rewards. As an incentive, many unsecured credit cards also offer a rewards program to entice applicants. There are a variety of rewards programs, so do your research to understand the details of different programs before applying. Some programs let you earn points, miles or cash back for every dollar you spend. And depending on the card, you may qualify for sign-up bonuses and earn extra points when you spend a certain amount within the first 90 days of opening the account.
- You’re looking for an easier way to budget. An unsecured credit card is also practical if you’re looking for an easier way to budget and manage your money. Instead of using a debit card every month and having multiple transactions coming out of your bank account, use an unsecured credit card for all purchases, and then pay off the card at the end of the month. Using the card for everyday purchases can also help you accumulate rewards points faster.
Only use a credit card heavily if you’re committed to paying off the balance every month.
Pros and Cons of an Unsecured Credit Card
- Enjoy worldwide purchasing power. One benefit of an unsecured credit card is the ability to use the card worldwide—as long as the merchant accepts your particular card. This is a bonus if you travel abroad frequently. Whether you choose a Visa, MasterCard, Discover or American Express, select cards that don’t charge a foreign transaction fee. Avoiding this fee can help save you money when traveling out of the country.
- Build good credit with positive activity. Using an unsecured credit card is a simple way to build or repair terrible credit after you’ve made poor decisions or experienced a credit mishap.
- Save on purchases. If you apply for an unsecured credit card with a rewards program, there’s also an opportunity to save on future purchases. Once you accumulate enough reward points, redeem these points for airfare, gift certificates, merchandise, a check or statement credit. Read up on the details of a program before getting a card. For example, some reward programs have blackout dates on travel, and some reward points expire after a certain timeframe.
- You don’t have to pay upfront cash. Because an unsecured credit card doesn’t require a security deposit or collateral, you can get a card without giving the credit card issuer upfront cash. Keep in mind, however, some unsecured credit cards have annual fees. Take note of cardholder benefits to see whether these benefits justify the yearly fee.
- Fraud protection. In the event that you’re a victim of identity theft or fraud, an unsecured credit card provides a measure of protection. You will never be liable for more than $50 of fraudulent charges. Monitor your credit activity on a regular basis, and then contact your credit card company immediately if you detect fraudulent activity. The sooner you report unauthorized charges, the sooner your credit card issuer can remove charges from your account. Consider signing up for fraud protection, which sends an alert if someone attempts to open an account in your name.
- Risk of overspending and debt. Despite the benefits of an unsecured credit card, one downside is the risk of overspending and accumulating massive debt. If you decide to apply for a credit card, use the card responsibly and only charge what you can afford. Avoid debt by paying off your credit card balances each month.
- A danger of a lower credit score. If you use your credit card heavily and can’t keep up with your minimum payments, there’s the risk of damaging your credit score. Payment history makes up 35% of your credit score, so make sure you don’t miss a payment. You can also damage your credit score by keeping high credit card balances. As a rule of thumb, never charge more than 30% of your credit line.
Expensive interest charges. An unsecured credit card can be expensive if you carry a balance from month-to-month. Credit card interest rates vary, so compare rates before applying for a card. Get into a habit of paying off your balances in full to avoid interest charges.
How Does an Unsecured Credit Card Work?
If you’re thinking about applying for an unsecured credit card, it’s also important that you understand how these credit card accounts work. This is need-to-know information, especially if you’re applying for your first credit card account ever.
To begin the process, you must complete and submit an application to the credit card company. Many credit card companies have online applications for your convenience. Double check your application to make sure you provide accurate information, which is crucial to avoiding approval delays.
Once the credit card company receives your application, you’ll get a response within minutes or days. If applying for an instant approval credit card, responses usually come within minutes of submitting your application, although it can take a week to receive your card.
Before issuing an approval, it is customary for a credit card company to review your credit report, your credit score and your income, and then use this information to determine your credit line. If you have existing debt or low income, the credit card company may approve your application and extend a low credit limit, and then increase your credit limit as you demonstrate creditworthiness.
Use your credit card for everyday purchases. Sometimes, credit cards are safer than using a debit card or cash. Even so, don’t get in over your head. You’ll receive a monthly statement, and you’re required to pay at least the minimum payment by your due date. Don’t wait until the last minute to make a payment. Pay as soon as possible—perhaps the day you receive your statement—to avoid a late arrival. Another option is setting up automatic payments to ensure your credit card payments are never late.
Secured Credit Card vs. Unsecured Credit Card
It’s also important to understand the difference between a secured credit card and an unsecured credit card. When you apply for a secured credit card, the credit card issuer will require a security deposit or collateral. The amount you choose to give a security deposit is your choice, although many banks have minimum and maximum deposit requirements. Typically, security deposits determine the credit line. Therefore, if you pay a $500 deposit, you’ll receive a credit card with a $500 credit limit.
Another difference between a secured credit card and an unsecured credit card is that many secured cards include extra fees. In addition to your security deposit, you might pay an annual fee, a one-time setup fee, and a monthly maintenance fee. For that reason, secured credit cards are usually more expensive than other types of credit cards and less desirable.
On the other hand, if you’re establishing your credit history or trying to rebuild a low credit score, a secured card is worth consideration because many of these cards don’t require a credit check and they’re designed for specifically for people with the lowest credit scores.
An unsecured credit card for bad credit is another option, but these cards aren’t as widely available. Since these credit cards don’t require a deposit, they’re not offered by every credit card issuer. You’ll have to research different credit card companies to find a bank that gives credit cards to bad credit applicants with no security deposit.
Understand, however, unsecured credit cards for bad credit are expensive with interest rates climbing as high as 29.99%. This can be costly if you carry a balance from month to month. If you prefer an unsecured credit card for bad credit, only apply for a card if you’re committed to paying off your balance in full every month.
What to Consider When Applying for an Unsecured Credit Card?
Before applying for an unsecured credit card, here are a few factors to help you decide the right card for you.
- What are cardholder perks? Research different unsecured credit cards to find a card that offers perks you can utilize. For example: Do you travel frequently? If so, you might benefit from a credit card that offers free rental car coverage. Or if you’ll use the card to purchase electronics, clothes and other major items, you’ll benefit from cards offering price protection or purchase protection, as well as a free extended warranty on electronic purchases.
- How often would you use the card? If you plan on using an unsecured credit card for everyday purchases, it only makes sense to choose a card with a rewards program. Conduct a self-evaluation to assess which rewards program can offer the most benefit. If you travel often, seek a travel rewards card with traveler benefits, such as free baggage check, onboard discounts, priority boarding and more. Or if you frequently shop online, look into credit cards offering a higher percentage of cash back on online purchases. Also, consider whether the card offers a sign-up bonus. This bonus can jumpstart your earning potential because you’ll receive additional reward points when you spend a certain amount within the first 90 days of opening the account.
- What is the introductory rate? As an incentive, some unsecured credit cards offer an introductory rate of 0% on balance transfers and purchases. This is a fantastic promotion if you’re consolidating your credit card debt onto a single card. Be mindful of the fact that introductory rates expire, so come up with a plan to pay off your balances within the first six to 18 months to avoid interest charges. Also, look for credit cards with a low standard APR. This way, you’ll continue to save money once your introductory rate period expires.
An unsecured credit card is the most common type of credit card, but this doesn’t mean that every unsecured card is right for your wallet. Do your research and make sure you understand the benefits of these cards, as well as the risks. Keep a close eye on interest rates, rewards programs and annual fees, and be determined to manage the account responsibly an build a strong credit score.