Most credit cards are unsecured, which means you don’t have to put down any collateral when you open them.
Although unsecured credit cards are the most common cards out there, they can be hard to get for new borrowers and people with damaged credit scores. Read on to learn more about these cards and how they compare to the alternatives.
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What does it mean for a credit card to be unsecured?
In the credit industry, the term unsecured refers to borrowed money that isn’t backed by collateral—an asset that your lender can keep if you fail to pay them back on time.
You’re probably familiar with collateral in the context of loans. For instance, on mortgages, the collateral that “secures” your loan is your house, since the bank can foreclose on it (reclaim it) if you stop making payments.
Some credit cards, known as secured credit cards, also feature collateral. When you open them, you have to put down money as a security deposit, which your lender can keep if you consistently fail to pay your bills.
If a credit card is unsecured, it just means that you can open it without putting down a deposit.
Note that the term has nothing to do with safety. Although “unsecured” sounds worse than “secured,” neither type of card is any less safe to use.
Unsecured cards are harder to qualify for
Unsecured cards are riskier for lenders than secured cards. If you suddenly stop paying your bills on a secured card, the credit card company can keep your deposit to make up for their loss, whereas on an unsecured card, they don’t have this option.
For this reason, unsecured credit cards are more exclusive than secured cards. Almost anyone can get a secured card, but if you have a bad credit score, it can be hard to get an unsecured one.
This doesn’t mean that you need a stellar credit score to get an unsecured card. In fact, some companies specifically offer unsecured cards for bad-credit borrowers. These cards are just harder to qualify for on average.
Should you get an unsecured card?
Unsecured credit cards come with many benefits, but they also have risks that you shouldn’t take lightly.
Todd Christensen, an AFCPE-accredited financial counselor and education manager at Money Fit, told us that you should only get an unsecured credit card after you meet the following four conditions to ensure you’re financially prepared:
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- Save up an emergency fund that would cover at least 1 month of necessary living expenses
- Hold a job that provides regular income—full-time or part-time—for at least 12 months in a row
- Create and live by a budget that shows you can live below your means for at least 12 consecutive months
- Use a debit card without having any declined purchases or overdrafts for 12 consecutive months
Making sure you’re financially stable and capable of keeping your spending under control is the best way to avoid racking up unsecured credit card debt.
Perks of unsecured credit cards
Unsecured credit cards tend to have several advantages over secured cards:
- Lower APRs: A credit card’s APR is the yearly rate of interest you’ll pay on it if you carry a balance from month to month. Unsecured cards often have lower interest rates than secured cards.
- Higher credit limits: On most secured credit cards, your credit limit is determined by the size of your deposit. It’s easier to get a high limit on an unsecured card since it’s not tied to how much money you can put down upfront.
- Rewards and benefits: Unsecured cards are more likely to offer rewards (such as cash back) and other perks, like concierge services and airport lounge access.
Note that the above isn’t universally true, particularly when it comes to credit cards for bad credit.
If your credit score leaves something to be desired and you’re deciding between a secured and unsecured card, make sure to look carefully at each card’s Schumer Box. This will list all of its APRs and fees; carefully compare them to see which card is actually better.
When to get a secured credit card instead
You should consider getting a secured card if you:
- Have bad credit: If you’ve struggled with credit trouble in the past, many credit card companies will only be willing to offer you a secured credit card. From their perspective, giving you an unsecured card would be too big of a gamble.
- Are a new borrower: Similarly, if you’re young or just have never used credit much before, you have an unproven track record, so it will be much easier to get a secured card than an unsecured one.
If you fall into either of those categories, a secured credit card might be right for you. With that said, Christensen told us “It doesn’t make much sense for a consumer to use a secured card if they already have an unsecured credit card.” Think of a secured card as a stepping stone to an unsecured card.
What credit score do you need to apply for an unsecured card?
There’s no one minimum credit score that you need to apply for an unsecured credit card. Every credit card company is free to set their own requirements.
That said, you’ll have a lot more trouble finding an unsecured card if you have a FICO score below 580. Scores in this range are considered “poor,” and it’s a common cutoff point, even for entry-level unsecured credit cards.
Other requirements for an unsecured credit card
Your credit score isn’t the only thing that matters when you apply for an unsecured credit card. To decide if you’re eligible, the card issuer may look at your:
- Credit report: If you have derogatory marks on your credit report, those might disqualify you from getting the credit card you want, even if they’re old enough that they’re not really hurting your credit score anymore.
- Income: This doesn’t show up on your credit report, but credit card companies often look at it anyway to make sure you’ll be able to keep up with your debts.
- Regular expenses: For the same reason, your prospective credit card company will be interested in your debt-to-income ratio (e.g., your monthly rent or mortgage payments and other expenses, as compared with your income).
- Prior relationship: If you already have one or more of the company’s other credit cards, they’ll factor in your payment history on them. If you’ve shown them that you’re a responsible borrower, that can sometimes compensate for a poor credit score. However, the reverse is also true; if your history with them has been fraught, that might counterbalance an otherwise solid credit profile.
When you apply for a secured card, it’s also possible that your prospective creditor will look at all of the above. However, it’s less likely, since secured cards are easier to get in general.
Some credit cards offer prequalification or pre-approval
If you’re not sure whether you’ll qualify for a particular card, you can test the waters by visiting its website and seeing if there’s an option to prequalify.
This will give you an idea of whether or not you’re eligible for the card (although getting pre-approved isn’t a guarantee). It also won’t hurt your credit, since prequalifying just involves a soft credit check, which will have no effect on your credit score.
Alternatives to unsecured credit cards
If you can’t qualify for a secured credit card right now (or if all the ones that you can get have exorbitant fees), you have several other options.
Getting a secured credit card
It might go without saying, but the obvious alternative is to get a secured credit card. You can use it for a while to improve your credit score, then apply for an unsecured one.
Note that many secured cards will let you upgrade to an unsecured card after a while (e.g., if you use it for 6 months to 1 year without missing any payments). On most cards, when you upgrade, your card issuer will refund your security deposit.
Becoming an authorized user
Instead of getting a credit card of your own, you can also ask a trusted family member or friend to add you as an authorized user on their credit card. If they do, you’ll receive your own physical copy of their credit card and be able to use their line of credit.
In many cases, their credit history on the card will also be added to your own credit report. This will give your credit score a boost (assuming they’ve managed the account responsibly), and will leave you in a much better position to apply for an unsecured credit card of your own in the future.
Just be sure to not overspend on the account. The primary cardholder will be responsible for your debts, so being careless might damage your relationship with them, and if they fall behind on their bills, being an authorized user might end up hurting your credit rather than helping it.
