Takeaways
- Unsecured credit cards are credit payment cards issued by banks and lenders.
- Unsecured credit cards are a revolving credit line not backed by collateral.
- Unsecured credit cards offer rewards programs like cash back and travel points.
- Unsecured credit cards have high APRs and require hard credit inquiries.
- Banks, credit unions, and credit card companies assess your creditworthiness by reviewing your credit score, income level, and credit report.
What Are Unsecured Credit Cards?
Unsecured credit cards are credit payment cards that are not backed by collateral. Unlike secured credit cards, which require a security deposit or down payment, credit lenders rely solely on your creditworthiness to determine your eligibility. Lenders thoroughly evaluate what credit cards you qualify for and set your credit limit, annual percentage rate (APR), and rewards programs.
Read More: What Is a Cash Back Credit Card?
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On Upgrade’s Website
Upgrade Credit Card
Smart Money Rating: 5/5
Cash Back: 1.5%
Best For: Establishing Credit History
Credit Line: $500 – $25,000 (Terms Apply)
How Unsecured Credit Cards Work
Whether you are signing up for your first credit card or trying to get a new one with a better reward program, it is essential to understand the types of credit cards. Unsecured credit cards are unique because they can offer a quick path to building credit but come with high interest rates.
When you have the best credit card, you will submit a formal application through their website or mobile app. When you fill out a credit card application, lenders will conduct a hard credit inquiry. During this process, they evaluate your recent credit history, salary level, and debt load to determine your capacity to repay your revolving monthly credit card bill.
Based on their assessment, you will be approved or denied a line of credit. This line of credit comes with a credit limit, which is the maximum amount you can borrow while using your new credit card.
Because unsecured credit cards are not backed by any collateral, lenders are at financial risk if you default on your payments. Credit card companies have limited recourse if you decide not to pay your credit card debt. All they can do is report this information to the credit bureaus, which will impact your credit report and blunt your ability to get favorable financing in the future. Additionally, card companies charge higher interest rates on unsecured credit cards to protect themselves from default risk.
Read More: How to Apply for a Credit Card
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On Continental Finance’s Website
Reflex® Platinum Mastercard®
Smart Money Rating: 5/5
Best For: Building Credit
Initial Credit Limit: Up to $1000
Understanding Credit Card Management
Unsecured credit cards operate on a revolving credit system. You will get a pre-approved credit limit when your credit card application is approved. You can use your card immediately to make purchases, whether buying an airplane ticket to London or simply buying your next salad for lunch.
With your new credit card, you can start making purchases, link your card to your payment apps, withdraw cash advances, and begin paying off your credit balance each month.
Unsecured credit cards are super easy-to-use credit products, but they require active management. Here is how you have to manage your credit card use regularly:
- Monitor Purchases: Credit cards are incredibly easy to use to buy things you need. As a result, you need to actively manage your spending and stick to a monthly budget to ensure you don't spend more than you make. Because you will use your credit card often, you should review your statements for accuracy. (Plug and play with our 50/30/20 Budget Calculator).
- Repay Statement Balances: All credit cards are different, but you typically have a grace period (between 20-25 days) after your statement closing date to pay your credit card balance in full without incurring any interest charges. You can link your credit card account to your online checking or savings account. When you pay your bill, your available credit limit is automatically increased. (Learn how to never miss a payment by automating your finances).
- Pay Minimum Payments: If you do not pay your credit card balance in full by the due date, you are usually required to make a minimum credit card payment. This minimum payment is typically a percentage of your outstanding balance, often around 2-3%. Check your credit card account to calculate how much you own. (Read more about minimum credit card payments).
- Avoid Interest Charges: Interest charges are calculated based on your outstanding balance. These charges are added to your account statement balance each month, increasing how much you need to repay. High credit card balances and recurring interest charges adding to those balances can make it challenging to pay off your credit card debt. You can avoid these by paying your balance in full each month. (Read more about how to pay off credit card debt quickly).
Qualifying for an Unsecured Credit Card
You can get a new credit card by meeting specific creditworthiness criteria. Here are the factors lenders comb through to determine your eligibility for different credit cards:
- Credit Score: A good to excellent credit score is generally required for most unsecured credit cards. A higher credit score translates to getting better interest rates and higher credit limits. (Read more about your FICO and VantageScore).
- Credit History: Lenders review your credit history, including past credit card usage, loan repayment history, and any instances of late payments, defaults, or bankruptcies. A more extended credit history with a consistent record of on-time payments will be viewed favorably.
- High Income: Lenders will consider your ability to generate income consistently. They will review your total cash compensation, including your salary, annual or quarterly bonuses, and side hustle income.
Credit card companies want to see how much monthly cash flow can go to paying off debt, which helps them set your credit limit. (Learn how to get the promotion you deserve).
- Debt-to-Income Ratio: Once credit card companies can review your income, they will evaluate your level of consumer debt and other debts (e.g., mortgages).
From there, they will calculate your debt-to-income ratio (DTI), the ratio of your monthly debt payments (including credit card payments, loan payments, and other recurring debts) to your gross monthly income.
A lower DTI generally indicates a stronger ability to manage debt and repay credit card balances.
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Debt-to-Income Calculator
Monthly Debt Payments
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Your Debt-to-Income Ratio
- Employment History: One key factor in the quality of income is consistency. Lenders want to see a steady stream of reliable income and employment history.
They evaluate factors like length of employment, income increases, whether you have multiple income streams and over-income stability. They want to ensure you have enough monthly income to make your monthly payments on time and in full. (Read about how to advance your career).
- Credit Inquiries: Before you apply for a credit card, it pays to do research and only apply to one you really want. Frequent hard credit inquiries can negatively impact your credit score over time because they signal a desperate need for credit. You want to limit the number of credit card applications you submit within a short period of time.
Take the Next Step:
On Continental Finance’s Website
FIT™ Platinum Mastercard®
Smart Money Rating: 5/5
Best For: Building Credit
Initial Credit Limit: $400
Pros of Unsecured Credit Cards
- Convenience and Flexibility: Credit cards are super easy to use and highly convenient. Plus, you can link them to mobile payment apps, like Paypal or ApplyPay, and use them to make everyday purchases with your phone. You can use your credit card to purchase just about anything.
- Credit Building: An unsecured credit card can significantly boost your credit score. By making on-time payments, keeping your credit utilization low (the amount of credit you use compared to your total credit limit), and maintaining a low debt-to-income ratio, you can quickly improve your creditworthiness.
- Rewards Programs: The best credit cards offer rewards programs, such as cash back, travel miles, or interest-free periods for balance transfers, that can save you money. These rewards can offset the cost of using the card and even provide significant value, such as free travel or discounted merchandise. (Read more about travel rewards credit cards).
- Fraud Alerts: Credit card companies have gotten much better at detecting, preventing, and solving fraudulent charges. You can “opt-in” to fraud alerts and investigate suspicious charges. (Read about the 7 Surprising Reasons to Use Your Credit Card).
- Purchase Protection: Credit cards offer purchase protection, extended warranties, and travel insurance. Purchase protection covers items against damage, theft, or accidental breakage within a specific timeframe. Extended warranties can save money by extending the original manufacturer's warranty on eligible purchases. Travel insurance covers trip cancellations, lost luggage, and other travel-related emergencies.
Cons of Unsecured Credit Cards
- High Interest Rates: Unsecured credit cards typically carry higher interest rates than secured loans due to the lender's increased risk. Carrying a credit card statement balance with a high APR can increase interest charges, which can quickly snowball and become challenging to manage.
- Risk of Overspending: The convenience of using credit cards can easily lead to overspending, especially if you are not carefully tracking your expenses and staying within your budget. Unplanned spending can quickly cause debt accumulation. (Read more about debt consolidation).
- Debt Management: If you cannot make your minimum monthly payments or carry a high balance on your credit card, you can quickly find yourself in a cycle of debt. This can significantly impact your personal finances, including damage to your credit score, difficulty obtaining future credit, and even potential legal action from creditors. (Read more about the 30% Rule and How to Manage Credit Card Debt).
- Hurting Credit Score: Late payments, missed payments, and high credit utilization can all negatively impact your credit score. A low credit score can stymie your ability to get approved for mortgages, installment loans, personal loans, or even rent an apartment.
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Smart Summary
Unsecured credit cards are payment cards issued by banks, credit unions, and other financial institutions that don’t require collateral or a down payment. They allow you to buy now and pay later for everyday purchases. By using credit cards responsibly, you can enjoy building credit, relish the convenience of swiping your card for payment, and even earn valuable rewards points or miles.
