“A LARGE RESPONSIBILITY”
by Contributor
(Sep. 27, 2019) — If you are wondering what is an unsecured credit card, you should click here for a guide on everything to know about getting and having one.
29% of Americans don’t own credit cards. Are you one of them? Credit cards can seem intimidating, but they serve an important role in our increasingly cashless society.
You can likely benefit from using a credit card if you don’t have one already. If you’ve looked around, you’ve no doubt seen terms such as “secured” and “unsecured” credit.
But what is an unsecured credit card anyway? Well, there’s a big difference between cards that are secured and those that aren’t. In fact, the card you choose will impact your interest rate, maximum credit, and determine if you need to pay out of pocket.
Take a moment out of your day to uncover the unsecured credit card definition, as well as some credit tips that any borrower should know.
- What Is an Unsecured Credit Card?
If you aren’t familiar with credit cards, an “unsecured” one may sound risky. But the reality is most people use this type of card. It has nothing to do with its security protection.
An unsecured card doesn’t require a security deposit. This is different from a secured credit card. With a secured card, you have to give the bank a sum of money which they’ll keep if you ever become delinquent with credit card payments.
That means an unsecured credit card is better then, right? Not exactly. While you don’t have to pay an upfront deposit to use this type of credit, the consequences for missing a payment are far more severe.
That’s because there’s no security deposit for them to draw from. Instead, they’ll send a collection agency after you to make up the difference. This could also lead to wage garnishment should your lender pursue legal recourse.
- Why Use an Unsecured Credit Card?
Yes, unsecured credit cards can be risky. But there’s a reason people prefer them. They tend to offer some of the best rewards, benefits, and interest rates.
Most importantly, they have larger credit limits. This can give you more financial freedom and security. A larger credit limit means you’ll use less of your total credit, which will help you maintain a better credit score.
And it’s not just about credit and rewards.
Nobody wants to put down hundreds of dollars on a security deposit. Even though they’ll get the money back after closing the account, it’s still money that could be better spent elsewhere.
- Who Should Use an Unsecured Credit Card?
In a perfect world, everyone would have an unsecured credit card. But not everything is perfect.
This type of card isn’t always an option if you have bad credit. These often require a fair or good credit score. Lenders don’t want to offer a line of credit to someone who might not pay them back.
But an unsecured credit card can be worthwhile even if you have bad credit. Lower interest rates can lead to big savings and make it easier to pay off debt. You’ll also improve your credit by having a lower credit utilization rate compared to secured cards.
The catch is you have to be careful. There’s no security deposit for you to fall back on. If you miss a payment, your credit score will take a massive hit and you’ll be responsible for accruing interest.
In short, stick to secured credit cards if you know you have a history of nonpayment. But if you’re ready to make a change and improve your credit, an unsecured credit card is a great option.
- How Do I Qualify for an Unsecured Credit Card?
If you have bad credit, this guide lists some of the best unsecured credit cards available. There are other ways to increase your odds of qualifying, too.
Consider getting a co-signer. This might be a friend or family member. The co-signer agrees to take on responsibility for any debt that you accrue and fail to pay.
Banks are happy with this agreement. Although they don’t have a security deposit, the co-signer, usually with good credit, works as a type of collateral. Whether you have no credit or bad credit, a co-signer can help you get a decent unsecured card.
Just be sure you don’t borrow more than you can afford. Otherwise, you’ll be putting your co-signer in a bad financial situation. This is sure to hurt even the best of relationships.
Want to avoid a co-signer? Not a bad idea. Improving your credit score is a surefire way to qualify for better credit cards.
- How Do I Improve My Credit Score?
Maybe you’re a young adult without a payment history or made some bad financial decisions in the past. If you have bad credit or no credit, most lenders won’t want to offer you great deals. But you can turn even the worst credit score around with the right advice.
First, concentrate on paying off any debt you currently owe. Even a small payment passed due can wreak havoc on an otherwise spotless credit score. In general, you don’t want to utilize more than 30% of your total credit line, or else that can damage your credit.
Consider getting a secured card and focus on making payments in full. Every month, you’ll slightly improve your credit score. After a year or two, your credit score may be in better condition and allow you to qualify for better options.
Lastly, you could become an authorized user on an existing card. You’ll be able to use someone else’s credit line. Whether or not you actually use the card, your credit score will improve as long as the owner of the card maintains regular payments.
Are You Ready for an Unsecured Credit Card?
So to recap, what is an unsecured credit card? It’s a powerful tool that offers financial flexibility and great rewards — all without a security deposit. But it’s also a large responsibility that can destroy your credit score if used incorrectly.
An unsecured credit card isn’t for everyone. If you can’t qualify or aren’t ready to take on the burden of extra debt, that’s okay. Consider picking up a secured card or avoiding lines of credit entirely.
Credit cards will still be there for you when you’re ready.
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