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While you may not have heard of unsecured credit cards before, you probably know what they are.
In fact, when you picture a “typical” credit card, you’re probably picturing one that’s unsecured. It’s just that the “unsecured” part is implied.
So what makes cards unsecured? And how do they differ from “secured” credit cards? Here’s what you need to know, plus which type of credit card might be right for you.
To understand what unsecured means, let’s first look at its opposite: secured.
A secured loan is one that’s backed by collateral — something the lender can take if you fail to pay back your loan. Some examples of secured loans include a mortgage, for which the house serves as collateral, and a car loan, for which the car serves as collateral.
An unsecured loan, as you might guess, is one that doesn’t come with any collateral. So, in the event you don’t pay your loan, the lender must find another way to recover its money, such as taking you to court or referring you to a debt collector.
For any prospective cardholder, checking your credit scores and credit reports should be the very first step. Learn how to get your free credit scores from FICO here, and get free access to your credit reports at annualcreditreport.com. You can also check to see if you’ve received any pre-approved credit card offers; this type of pre-qualification can help you determine which cards might work for you.
Most credit cards are unsecured: They don’t require you to put down any collateral when you open a card.
When you submit an application to the credit card company, it performs a credit check, assesses your debt and income, and then determines whether to extend you a line of credit. It does this knowing that, if you don’t pay your bills, it will need to send your debt to collections.
Because that puts the credit card issuer at risk, you need to have a decent credit profile to qualify for an unsecured card. If you’ve never had credit before, or if you have poor credit, the issuer may deny your application.
While you can find unsecured cards for bad credit — often touted as “no credit check credit cards” — we don’t recommend them. They tend to have exorbitant fees and terrible customer service. Try one of these credit cards for rebuilding your credit instead.
If unsecured cards aren’t an option because you’re building or rebuilding credit, secured cards are a fantastic alternative.
Just like they sound, these credit cards are backed by collateral: a security deposit. When you’re approved for a secured credit card, you’ll need to put down a deposit, often ranging between $200 and $2,500.
In most cases, that will be your credit line — so, if you put down a $500 deposit, you won’t be able to spend more than $500 without paying off some of your bill.
It’s not like your deposit is gone forever, though. If you keep your credit card account in good standing, the issuer will give your deposit back when you close your account.
But, if don’t pay your bill, the credit card company can keep your deposit. Since this significantly lowers their risk of losing money, credit card companies are more willing to approve applications for secured cards from borrowers with no credit or bad credit.
That said, be careful when applying for secured cards. While there are some excellent choices, there are also some predatory issuers that charge a slew of unnecessary fees. We recommend cards from major issuers like Discover and Capital One over smaller cards from OpenSky, Credit One Bank, and Total Visa.
Read more about secured credit cards here.
What’s the difference between secured cards and debit cards? While they both use your money — debit cards rely on what’s in your checking account; secured cards on your security deposit — there are some major differences. For one, a good secured card will report your monthly payments to the credit bureaus, helping you build your credit scores. It will also be backed by a $0 fraud liability if the card’s lost or stolen. While debit cards do offer recourse in the case of unauthorized charges, the protections aren’t quite as robust.
When compared to secured cards, here are the advantages of unsecured credit cards:
And here are the cons:
Both unsecured and secured credit cards can help you build credit. Before applying for a secured card, just make sure it reports your behavior to all three major credit bureaus: Equifax, Experian, and TransUnion. Then, if you’re approved for the card, practice responsible use by paying off your balance each month. If you do, you’ll probably see your FICO scores start to rise — and could eventually be upgraded to an unsecured card!
If you can get approved for an unsecured card, they’re the way to go. They generally have fewer fees, lower interest rates, and higher rewards, and are available in a much wider array of categories than their secured brethren.
However, you might not have a choice. If you have less-than-perfect credit or a limited credit history, you might not qualify for an unsecured card. In that case, a secured card is still a great option.
Our recommended secured cards don’t charge annual fees and, importantly, share your behavior with the credit reporting agencies so you can improve your credit scores.
Once your credit’s strong enough, the best secured cards offer credit line increase opportunities or automatic upgrades to unsecured cards, too.
Here are our picks:
No matter which card you choose, make sure you use it responsibly so you can continue to build your credit — and, one day, get approved for any card you choose.
Unsecured credit cards are “regular” credit cards that don’t have any collateral backing them. Secured cards, on the other hand, require a security deposit — and are a better fit for people with bad credit.
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