What Is An Unsecured Credit Card?

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What is an Unsecured Credit Card?

The vast majority of credit cards are unsecured credit cards.

There are a type of credit card that does not require you to put up a cash deposit as a collateral to get approved. This is in contrast to secured credit cards, which requires a security deposit to get approved.

Because unsecured credit cards do not require a security deposit, they are more difficult to get. Most unsecured credit card issuers will check your credit worthiness via your credit report and FICO score, as well as your income to determine whether to approve you and what credit limit you will get.

Recently, there have been a couple of new unsecured credit cards issued by startup Fintech companies that do not perform any credit checks. Instead, they require you to link your checking account and they will check your cash flow (ie income and expenses) and determine whether to approve you and if so, how credit limit you will get. These cards are ideal for those with no credit or poor credit and have much lower fees and higher limits than traditional unsecured credit cards that target this segment.

A typical unsecured credit card gives you the option of either paying your balance in full or over time. Credit cards that require you to pay your balance in full every month is called a charge card.

Benefits of Unsecured Credit Cards

Does not require a cash deposit for collateral - An unsecured credit card will approve you and set your credit limit based on their assessment of your FICO score, income and othe factors. Hence, you do not have to put down a cash security deposit.

Offers better rewards - Unsecured credit cards that target those with good to excellent credit often offer lucrative cash back and reward programs. Many also offer introductory teaser 0% APR deals to attractive customers. Unsecured credit cards targeting those with fair credit are increasingly offering attractive cash back programs.

Most have no annual fees - The vast majority of unsecured credit cards have no annual fee though ome of the higher end rewards credit cards may charge annual fees. However, unsecured credit cards that target people with bad credit tend to have high fees to offset the risk that they are taking on subprime customers.

Can pay over time - Unsecured credit cards allows you to either pay your bills over time and carry a balance or in full every month (note: we at Ask Mr Credit Card always recommend that you pay in full every month).

Drawbacks

More Rigorous Approval Process - As unsecured credit cards do not require any security deposit, lenders have tougher FICO score requirements for approving an application. People who have very little credit history or those with bad credit will find it more difficult to get an unsecured credit card.

Tougher for those with little or no credit history to get - People with very credit history have a tougher time getting an unsecured credit card. Many find it easier to start building credit history with a secured credit card instead, where you have to put up a security deposit.

Having said that said, there are new unsecured credit cards by FinTech firms that will ignore your credit score but look instead at your bank account and cash flow to approve you. Very often, these issuers require that you connect your bank account via a service like PLAID, which enables issuers to see your historicall cash flow and approve you based on that.

Higher Fees for bad credit unsecured credit cards - While the majority of unsecured credit cards have no annual fee, unsecucured credit cards for bad credit tend to have high fees and much lower credit rating.

Characteristics of Unsecured Credit Card Based on Credit Score Target?

Most credit cards are unsecured and the vast majority are targeted to those with good to excellent credit. There are unsecured credit cards that target those with fair credit, or what many would called near-prime. And there are a number of credit card issuers that target people with bad credit.

GOOD TO EXCELLENT CREDIT - MORE PERKS

The majority of unsecured credit cards are for those with good to excellent credit. Very often, these credit cards have reward programs like cash back and airline miles. Many also offer low interest rates and even teaser 0% APR deals. While most unsecured credit cards in this category have no annual fee, some premium cards charge an annual fee but give you many geneous rewards in return. Depending on your income and credit score, you can get credit limits as high as $25,000. You would typically need a FICO score of 700 and above to get these unsecured credit cards.

FAIR CREDIT - MODEST ANNUAL FEE AND LOWER CREDIT LIMIT

Both Experian and Equifax define fair credit as having a FICO score of between 580 and 669, while a Vantage score of between 601 and 660 is considered fair credit. Unsecured credit cards credit cards targeting people with these credit scores tend to charge an annual fee but have much lower credit limits than credit cards for good credit. A typical starting credit limit is between $500 to $1,000 and can reach up to $3,000.

BAD CREDIT - MORE FEES AND LOWER CREDIT LIMIT

Unsecured credit cards that target people with bad credit tend to have more fees. Many charge an annual fee and add on a monthly fee from the second year onwards. Some even charge an one-time program fee just to "activate" your card. The credit limits tend to be low and range from $300 to $500. Credit limit increases are more difficult to come by.

Who is unsecured credit cards best for?

Those who pay in full - Those of pay in full every month and do not carry any credit card debt have many choices when it comes to unsecured credit cards. For these group of consumers, credit cards with reward programs will provide the most value from their credit card use. Cash back credit cards, airline credit cards and other rewards cards are ideal for them.

Those who carry a balance - Those who carry a balance occasionally and have good to excellent credit have many good choices of unsecured credit cards as well. Many offer low interest rates and even teaser 0% APR deals for purchases and balance transfers. Consumers who have very credit can get approved to these deals with good credit limits as well.

Those with no credit or poor credit history - Even though it is harder for those with no credit or poor credit to get an unsecured credit card, it is not totally impposible. Though most traditional credit cards that target people with bad credit have high fees and low credit limits, a new breed of unsecured credit cards are now not perforning any credit checks but are instead using your cash flow (via linking your checking account) to evaluate your credit worthiness. These cards tend to have very low fees and a decent credit limit compared to traditional subprime credit cards.

ALternatives to Unsecured Credit Cards

If you have very little credit history or if your FICO scores are 580 and below and considered bad, then you might want to consider the following alternatives.

Consider a secured credit card - A secured credit cards, unlike an unsecured card, requires you to put down a cash deposit as a collateral. The amount that you put down becomes your credit limit. Most secured credit cards require you to put down at least $200 in security deposit so it is relatively affordable. Once you have funded this security deposit and gotten your card, you can start using it like a regular credit card. With responsible use over time, some secured credit cards may graduated you to an unsecured credit card and refund your security deposit.

Be an authorized user - Being an aurthorized user allows you to access credit without any credit check or application. Being an authorized user will also get you reported to the three major credit bureaus and you can build your credit by piggybacking on someone else's better credit.

Apply for unsecured credit cards that do not check your credit - A new breed of unsecured credit cards from new FinTech starts are now offering unsecured credit cards that do not perform any credit checks. Instead they require you to link your account to them via a third party service like PLAID. They can then monitor your cash flow and approve you based on your checking account activity, which should reflect your income and spending patterns. These unsecured credit cards also tend to base the credit limit they give you based on your cash flow as reflected in your checking account. They also tend to have much lower fees than traditional unsecured credit cards targeting those with bad credit.