What Is an Unsecured Credit Card?

Definition and Example of an Unsecured Credit Card

An unsecured credit card is a card where the issuer doesn't have a security deposit they can take if you don't pay your credit card balance. Instead, the creditor's options are to take further collection efforts. These include reporting the delinquent balance to a credit bureau, referring your account to a third-party debt collector, suing you in court, or asking the court for permission to garnish your wages.

• Alternate name: Credit card

Examples of unsecured credit cards include a Visa or Mastercard that you sign up for at your bank when you open an account. You're given a credit limit and specific terms, such as payment periods and interest rates.

How Unsecured Credit Cards Work

Most banks, credit unions, and other financial services providers offer unsecured credit cards. You must apply with your personal information and consent to a credit check to get one. Once you're approved for an unsecured credit account, you'll get a card that you can use in stores, online, and over the phone for purchases.

Unsecured credit cards are a type of revolving credit. That means that you're approved to spend up to a specific limit on the account, which renews after you pay your bill.

When you pay your balance in full, you don't have to pay interest on what you borrowed. However, when you choose to carry the balance, you usually have to pay interest on it, and you have to make at least the required minimum payment each month.

Unsecured Credit Cards vs. Secured Credit Cards

Unlike unsecured credit cards, secured credit cards require you to pay a deposit as collateral against the credit line offered. You can think of it as a card that you fund yourself.

Issuers usually require a deposit for credit if the applicant is considered a credit risk, meaning that they have no credit history at all or a poor credit score (under 579). The credit card issuer has the right to take the deposit that you give to cover the debt incurred if you default on a balance.

In some cases, the cardholder may also need to pay an annual fee. These cards aren't as likely to offer rewards programs in exchange for the fee, such as cash back or points toward purchases.

Advantages of Unsecured Credit Cards

Despite the potential legal hazard of having an unsecured credit card, most people would choose an unsecured credit card over a secured one, because that means they don't have to pay out money initially—money that could be in the bank earning interest. Additionally, unsecured credit cards typically have lower interest rates and offer rewards programs—rare features on secured credit cards.

How to Get an Unsecured Credit Card With Poor Credit

People with poor credit or no credit, or who have recently filed for bankruptcy will have the hardest time qualifying for an unsecured credit card. Most creditors see your shaky credit history as a warning that you may not be in a position to pay back what you borrow—even if you want to. Therefore, a secured credit card is your best bet for getting your credit back on track and qualifying for a better credit card once you're no longer viewed as a risk.

You can improve your chances of getting an unsecured credit card by using the secured credit card wisely for at least six months, which means not overspending. You should pay off any past-due amounts and reduce your balance as much as possible.

After using your credit card responsibly for several months, you may be able to convert to an unsecured credit card. If approved, your credit card issuer will refund the security deposit to you. However, you should be aware it can take several months to be considered for an unsecured credit card.