What is an Unsecured Card? A Guide to Traditional Credit Cards and Their Rates, Terms, and Limits

Chances are that, like me, you have an unsecured credit card or two in your wallet. Or maybe you’re interested in getting one for the first time. These accounts are great to have because, unlike their secured card cousins, you don’t need to submit any cash to the financial institution to guarantee the credit line.

Instead, the issuer grants you a credit card based on your past credit history, credit scores, and overall financial circumstances. Most credit cards are unsecured, so there are hundreds on the market from which to choose, which can make for an overwhelming decision.

Some unsecured cards are designed for people who are just starting out building credit or who have damaged credit, while others are for people with excellent credit. These accounts can be rich with rewards programs, benefits, and perks, or can be more basic in function. The choices are almost endless!

Here’s what you need to know about unsecured credit cards, from what to look for in an account to how to apply.

Before you pursue an unsecured credit card, you need to understand the application process and evaluate the card for your needs and desires. Each card and issuer has different attributes. 

Application Process

When you apply for a credit card, you will be supplying the issuer with your financial information and giving them permission to access your credit report and scores. There are various ways to apply for a credit card, including through the mail and over the phone, but by far the most common method is online. 

I highly recommend that you begin with the preapproval process. Many credit card issuers include a method for you to supply very basic information to find out if you are within the eligible range for that card.

It’s not a guarantee that you will qualify, but it will give you a decent idea based on the data that you supply them. This is considered a soft inquiry, so there’s no effect on your credit score. 

Credit applications are considered hard inquiries, meaning they’re recorded on your credit report and can impact your credit score. So it’s in your best interest to know whether you have a good shot at approval before submitting an application — and preapproval can help you do just that.

You should be selective with your credit cards. Check curated lists from reputable sites that assemble credit cards based on credit scoring ranges, such as this list of unsecured credit cards for fair credit.

These lists can help you narrow down your choices to those that best match your credit scores while simplifying the compare and contrast process. 

After that, you can complete the real application. When you’re ready, you will go to the credit card issuer’s website and apply for the card you want. Here’s what you can expect from the application: 

• Your income and employment status. This might be money you earn from a job or self-employment, your spouse’s income (noted as household income), child and spousal support, Social Security benefits, grants, and scholarships.
• Your household costs. Many credit card issuers ask you to include how much you spend for your basic household expenses. 
• Permission to access your credit history. The credit card issuer will then have authorization to check your credit report to see how much you currently owe and will compare that to the amount of money you earn on a monthly basis. Some credit card issuers will not grant unsecured cards to applicants who have certain information on their reports, such as late payments, charge-offs, bankruptcy, or excess applications for credit. It will also check your credit scores. Depending on the issuer and card, there may be a minimum score that the applicant needs to have.  

Credit Score Impact

When you apply for a credit card, the issuer will contact the three major consumer credit bureaus — Experian, Equifax, and TransUnion — to review the information listed on your files. That will trigger the bureaus to add a hard inquiry for credit to the inquiries section of your report. Although a hard inquiry will remain for two years, it will only be included in your credit scoring calculation for 12 months.

So why would applying for credit have any impact on your credit scores? Well, a credit score is more than just your grade in the metaphorical credit class; it’s a tool to assess risk. Specifically, how likely you are to default on any line of credit.

Opening a new line of credit means you’re looking to take on more debt, which is risky. Do it occasionally, and it won’t hurt your score much. Applying for a bunch of credit cards at the same time, however, is a sign that you might be taking on more debt than you can handle.  

The most common score used today is the FICO Score, but VantageScore is also popular. Issuers can use either or both of them, which is why we say credit scores (plural) instead of credit score.

All scoring models take the financial and credit information that is listed on your credit reports, input it into their proprietary algorithms, and then produce a score that businesses can use to get an instant evaluation of what kind of financial risk you may be. 

Credit scores range from 300 to 850, with higher numbers being preferable. The higher the number, the lower the risk. The factors included in a FICO Score, in order of most to least impactful, are:

• 35% Payment history. This is the most important factor because it’s what most credit issuers are concerned about. Do you pay your bills on time, and have you done so for many years? If so, this will definitely work in your favor. 
• 30% Credit utilization. The amount of money you owe on current revolving credit products — credit cards and lines of credit — is compared to the amount you can borrow. You will want to go as little as possible, both per account and in aggregate.
• 15% Length of credit history. Although there is nothing you can do to speed up time, the longer you have used credit products, well, the better for your score.  
• 10% Types of credit in use. A mix of credit products will give your scores a boost. For example, you might have a credit card, a car loan, and a finance company loan. As long as you treat all of them responsibly, it will work in your favor. 
• 10% Credit inquiries. Of course, you have to apply for a credit product to get it, but too many loan and credit card applications in a short span of time will give the appearance that you are desperate for money. 

Credit card issuers don’t always make it obvious regarding what kind of credit score an applicant will need, though some will specify that the card is best for people within a certain credit range. 

So where does your credit score rank? For a FICO Score:

These categories are similar but vary slightly for VantageScore, which isn’t as popular as FICO. The three credit bureaus — Experian, Equifax, and TransUnion — created VantageScore as an alternative credit scoring model.

Credit Limit Determination

You won’t know what the account’s credit limit will be until you apply for the credit card and have been accepted. In general, the limit is based on a combination of your credit scores, the amount of debt you currently hold compared to your income and basic living expenses, and your past charging habits. 

Therefore, if your credit scores and income are high, your living expenses and debt are low, and you have an established pattern of charging and repaying a lot of money, your credit limit will likely be high. 

Without all that, the issuer will probably start you out with a small credit line. After a number of months of positive credit use, though, the issuer may automatically increase the limit. You can also request a higher limit from the issuer if you have a history of paying your bills on time and in full. 

Interest Rates and Fees

Unless you get a credit card that is offering a promotional 0% interest rate on new purchases or balance transfers, any debt that you roll over to the next month will be subject to interest charges. 

The annual percent rate (APR) is the amount that the issuer will assess on revolved debt. For new card offers, typical APRs range from 21.41% to 28.28%. 

If you plan on charging purchases and then paying incrementally, it will be important to seek a credit card that has the lowest possible APR. When you do, the applied interest will be lower.

For example, imagine you borrowed $8,000 on your credit card that has a 22% APR and paid it off in six months. The total interest would be $497.08. However, if the APR were 28%, the total interest would be $665.89. The difference becomes even more extreme when the debt is higher and the length of payoff time is longer.

In addition to interest, the credit card issuer might also impose fees. Here are the most common:

• Annual Fee: Depending on the card, the issuer may charge an annual fee to manage the account. Typically, this fee will be higher if the perks and benefits that are associated with the card are expensive. 
• Late Payment Fee: If you pay your credit card bill past the due date or it is less than the minimum requested payment, the credit card issuer can charge you a late fee. The amount varies, but as an example, Chase charges up to $40. 
• Foreign Transaction Fee: Unless your credit card waives foreign transaction fees, you will be charged about 3% of your transaction when you use your card outside of the United States and its territories. 
• Balance Transfer Fee: You can open a credit card to transfer existing debt, in which case the credit card issuer will charge between 2% and 5% of the amount you move over. 
• Cash Advance Fee: If you decide to take cash out of your account instead of using your card for a purchase, the issuer will usually charge you a flat fee or between 2% and 5% of that amount, whichever is higher. 
• Over-Limit Fee: Although your credit card will have a specific credit limit, in some cases it is possible to go over that amount. If you exceed your limit, the fee can be $25 to $35 but can’t be more than the amount you spend over the limit. So if you were over by $10, the fee is limited to $10.

Read your cardmember agreement carefully to understand which of these fees (if any) apply to your card. You don’t want to find out by wondering why your bill is so high.

Although I am a big advocate for unsecured credit cards, they’re not right for everyone. 

With unsecured credit cards, the credit card issuer takes on considerable risk. The issuer grants the account based on your past habits and current situation, not the future. If you acquire a large balance and then fail to pay, it can be difficult to get the money back.

The credit card issuer will either send the debt to collections or sue you for the debt, but both scenarios are expensive, and positive results aren’t guaranteed. For that reason, they can be picky with whom they take on as a cardholder. 

If you haven’t established a credit history yet or have damaged credit, secured credit cards can be fantastic alternatives. There are a couple of varieties of secured credit cards. The most common is one where you provide the credit card issuer with a fixed amount of money, which it will keep in a separate account. A sort of financial belayer that serves as a safety net for both you and the lender. 

Your credit line will either be equal to the amount you put down as security or, in some cases, a little more. If you default on the account by not making your payments as agreed, the credit card issuer has the right to take the money held in deposit.

For example, if the security deposit is $500, that might be your credit limit. Some credit card issuers will even release your deposit early when you have proven to be a responsible cardholder. 

The other type of secured credit card is one that is granted based on the amount of cash you hold in a separate account that you open with the issuer. The credit limit associated with the card depends on how much you have in that account, so it will fluctuate if you make withdrawals or deposits. For example, if you have $1,000 in the attached account, $1,000 will be your limit, but if you add $500 to the account, $1,500 will be the limit. 

No matter how the secured card is structured, the cash that is held by the credit issuer acts as security to the issuer, so the risk to the issuer is minimal. In fact, as the cardholder, it also ensures that you have the money set aside should you need it. If you close the credit card with no balance due, you’ll get all your deposit back and even some interest that’s been added. 

If you’re in the market for an unsecured credit card, weigh the benefits and drawbacks of these accounts first. 

Benefits

There are a large number of positive aspects to having and using an unsecured credit card. Among them: 

• Builds credit history. When you use your card regularly and responsibly, you will be feeding positive information to your credit report that will translate into good credit scores. 
• Lucrative rewards programs. Many credit cards have a rewards program that allows you to accumulate cash back, points, or miles as you charge. You can profit from the process when you charge a lot and pay the debt off before interest is added. 
• Convenience and flexibility. You may not want to use your own cash for purchases or not have enough for an emergency. A credit line can come in handy, offering you the ability to borrow large sums of money and then repay it on your own schedule. 
• Wide acceptance. Instead of having to bring cash with you, all you need is your card. It’s safe, easy, and universally accepted. 

• Balance transfer options. Moving expensive balances to a card that offers 0% APR for a fixed period of time can help you save money on interest charges and help you get out of debt faster. 
• Consumer protection. If someone uses your account fraudulently, you can contact the credit issuer and have those charges purged from your account. Many credit cards also offer a wide variety of other consumer protection benefits, such as extended warranties and insurance. 

Drawbacks

Be aware that unsecured credit cards also have some disadvantages, especially if you mishandle them. For example:

• High interest rates. If the APR that is associated with your card is on the high side, the cost of paying a bill over time can escalate dramatically. 
• Risk of debt accumulation. When you have a high credit limit, it can be very easy to overcharge and then get into overwhelming debt. 
• Negative impact on credit score. If you mismanage your card by maxing it out and then revolving the debt over many months or years, your credit scores will suffer. It will be even worse if you skip payment cycles or the account goes into default.  
• Consequences of missed payments. The impact of missed payments goes beyond your credit scores. Your credit card issuer may suspend your account, increase the APR, or lower your credit limit. 

Now it’s time to put yourself in the driver’s seat! As a consumer, you have a right and responsibility to shop for the credit card that will be perfect for you. Here’s what to do and look for:

1. Compare Interest Rates and Fees

If you do plan on revolving balances, make sure you focus on an account that has a low APR. Even a point or two can make a big difference when the debt is high. Also, look for the fees. If the account has an annual fee, make sure you get more out of the card than it costs you.

Think you’ll be traveling overseas? Focus on one that doesn’t have foreign transaction fees. All interest rates and fees are available on the credit card issuer’s website, in the terms and agreement section. 

2. Know the Grace Period

One of the most important terms to know will be the length of the grace period. This is the number of days you have to spend with your card before interest is calculated on the balance. Common grace periods are between 21 and 25 days, so if you want a little extra time, search for a card that offers the longest grace period. 

3. Look for a Rewards Program that Matches Your Needs

A cash back card will give you a percentage of your purchase back. For example, you may get 2% cash back on everything you spend with a card. That means if you spend $20,000 in a year, you’ll have $400 back from the credit card issuer! Or, if you may prefer a card that rewards you with miles or points that you will redeem for everything from travel to gift cards. 

4. Review the Perks and Benefits

Credit card issuers often provide a whole host of extras for certain cards. You may get extended warranty protection on purchases, cellphone insurance, credits for ride-sharing services, VIP treatment at airports, concierge services, and even special events for cardholders. Review them all and decide which are important to you. 

Always read the fine print before you make a decision. The terms of a credit card contract will be clearly spelled out on the issuer’s website, so take the time to read them. If you are all confused, call the credit issuer and ask for clarification. 

Once you have the card, make a commitment to using it to your advantage. 

Make Payments on Time 

By far the most important thing that you can do to keep your credit scores high and your relationship with the credit card issuer positive is to pay your bills on time. Seriously, even one missed payment can be a major hit to your credit. Here are some tips to help keep you on track.

• Get alerts. Requesting the credit card issuer send you text or email alerts for when your payment is coming up.
• Mark your calendar. Add the due date to your wall or electronic calendar. 
• Enroll in automatic bill pay with your bank. You can have a fixed monthly payment deducted from your checking account and sent to your credit card issuer. This will be very convenient if you only use your credit card for certain purchases with an amount that does not vary, such as streaming services. 
• Set up automatic bill pay with your credit card issuer. This method offers more options. You can arrange for the minimum monthly payment, a fixed payment, or have the entire amount due withdrawn from your connected checking account on a date that corresponds with your due date. 
• Use a money management app. A third-party application that you download to your phone or other mobile device will help you stay in control over all of your accounts. 

In the event that you do forget about a bill or can’t get the complete payment in on time, contact your credit card issuer immediately. You may be able to avoid the late fee by asking for it to be waived. In some cases, you may even be able to change the due date on your account to one that makes more sense with your pay periods. 

Keep a Low Credit Utilization Ratio

One of the advantages of using a credit card is that you have access to a financial institution’s deep pool of funds, but it can also get you into trouble. 

Paying your balance in full will not just help your credit utilization ratio stay healthy, thus protecting your credit score, but you will guarantee that interest won’t increase the price of your purchases. 

Here is an example of how your credit utilization ratio is calculated:

As you can see from the example, the credit utilization ratio is 27%, which is just under the recommended 30%. To keep utilization low, make a habit of only charging what you can afford. When you do, you can avoid having to send monthly payments on old debt, which affects the amount of money you have for current expenses and future goals.

If you do want to charge something expensive — especially when it will max out your credit line — and then pay over time, have a plan in place. Suspend charging and calculate how much you can send to the account on a monthly basis until you’re debt-free. 

Monitor Your Account

Your credit card issuer will send your monthly statement, either by mail or digitally. Read it carefully. It will show all of the charges you made during that billing period, the amount you currently owe, and the due date with the minimum requested payment. If you did carry over any debt, it will also show the interest charges. 

In addition to checking your monthly statement, review your account on a weekly or even daily basis by logging into your account online or adding the issuer’s app to your mobile device and checking it anywhere you are.

Check your account balance often and review your monthly statements so you’ll know exactly how much you owe and make a plan to pay it bas ASAP.

This way you can track all of your charges in real time and will never be surprised by how much you owe. When you’re nearing your personal limit, stop charging and prepare for the payment. 

Another benefit of keeping such a close watch on your account is that you can identify fraud or other problems. For example, you may spot balances that are unusually high or charges that were made at an unfamiliar retailer. That will be your opportunity to immediately contact the credit card issuer and report the issue. The sooner you do, the faster it will be rectified. 

As you can see, having access to a credit issuer’s deep pool of funds without having to lock away any of your own money is pretty amazing. You can use these unsecured credit cards just about anywhere as you enjoy any of the rewards, perks, and benefits that may be associated with the account. 

Just use them correctly — and carefully — and they’ll be a powerful tool to build a bright financial future.