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What is an unsecured credit card?

In the U.S., there are two types of credit cards available: secured and unsecured cards. Both cards serve a different purpose, but there is a remarkable difference between the two. In this article, we'll look at the benefits of unsecured cards.

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What is an unsecured card?

Getting a credit card is a rite of passage for many consumers living in the United States. The question is: what type of card should you get?

In the U.S., there are two types of credit cards available: secured and unsecured cards. Both cards serve a different purpose, but there is a remarkable difference between the two. In this article, we'll look at the benefits of unsecured cards and how they compare to secured credit card accounts.

First: What is a secured card?

Secured cards require you to leave a security deposit with the lender or bank before you get access to the account. Your deposit amount is usually also your credit limit. So if you deposit $300, then your credit limit will be $300.

Banks vary in the deposits available, with minimum deposits being as low as $90. Lenders often allow you to deposit any amount within reason when securing your card.

The bank keeps this deposit in a separate account and opens your credit card for spending. At the end of the month, you need to pay off the entire outstanding amount, like you would with an unsecured card.

What is an unsecured credit card?

An unsecured card does not require you to place a security deposit with the lender to access the account. Instead, the credit card issuer will assess your application based on your credit history and your income, as well as your debt-to-income ratio.

These factors determine how the bank assesses the risk of loaning you money. If you have a low credit score, poor credit history and high debt-to-income ratios, they may decline to give you a line of credit. If they do give you a card, you'll likely to receive a high annual percentage rate (APR).

However, if you have a good to excellent credit score, a clear credit history and a low debt-to-income ratio, you're likely in a good position. You can expect to get the best rates on your unsecured card.

Secured vs. unsecured credit cards

When it comes to choosing between a secured or unsecured card, your final decision depends on your needs. If you're a student looking to build credit, for example, you might opt for a secured card if you aren’t able to build credit as an authorized user on a friend or family member’s card. 

Eventually, if you maintain a perfect payment history with credit card companies, most companies offering secured cards will offer you an increase in your credit limit. After 12 to 18 months, the lender may offer to upgrade your card to an unsecured account and return your deposit. The lender may also offer to lower your interest rates, as well.

One of the biggest drawback with secured credit cards is the APR offered by the lender. If you have poor credit, the lender will increase the APR on your secured card, which increases the cost of any outstanding debt associated with that account. 

You can apply for a secured credit card through most banks, private financial institutions and some credit unions, as well.

The benefits of using unsecured credit cards

An unsecured credit card is a credit card that doesn't require a security deposit. When most people use the term “credit card” in the U.S., they’re typically referring to an unsecured credit card. Most credit cards on the market today are unsecured; secured cards typically have “secured” in their name.

Most people opt for an unsecured credit cards over secured cards because they can avoid putting down a deposit for money they could put in the bank to earn interest. There are two other main perks of unsecured credit cards: they typically have lower interest rates and often offer rewards programs. 

But remember to read the fine print carefully before signing up for your card. Some banks offer introductory credit card offers, where you don't have to pay any APR for up to the first 18 months, but pay attention to when the grace period expires. 

Your credit card company may start you off with a small credit limit. If you prove yourself to be a creditworthy borrower, then the lender may offer you higher credit limits and drop your APR, but take care not to go on a spending spree that leaves you with high debts and interest rates. 

How do I apply for an unsecured credit card?

You can apply for an unsecured card through most banks or credit providers. After submitting your application, your lender assesses your credit report before issuing you the line of credit.

Remember to pay your card balance in full on the due date at the end of every month and review your credit score regularly. 

Unsecured cards and your credit score

Unsecured credit cards play a significant role in managing your credit score and maintaining your credit history. The three big credit bureaus—Experian, Equifax and TransUnion—all monitor your payment history. They get the data from banks, insurance companies and other financial institutions.

By making sure you pay on time and in full at the end of the month, your credit score will keep climbing. If you start to notice that your credit score is slipping even though you're making your monthly payments, it could be because of your credit utilization ratio.

Lenders don't like it when you use more than 30% of the credit available to you on your credit card account. As a result, if you spend over this threshold, it can damage your credit score. If you have a $3,000 limit on your card, and you need to use $3,000 making credit card purchases during the month, it's better to request a credit limit increase or apply for another card in order to spread your balance and keep your credit utilization ratio low. 

What to do if you’re new to the U.S. and have no credit history 

It used to be that a newcomer to the United States fell couldn’t “bring” their credit report or international credit score with them. Even someone with extensive credit in their prior home country would have to take on the onerous task of building her U.S. credit history back to its previous levels from scratch, which can take as long as five years.

Here’s the good news: Nova Credit has built technology to translate credit data from countries like Australia, Canada, India, Mexico, the UK and more into a U.S.-equivalent score that newcomers can elect to share with U.S. companies when they apply for credit products here.

This means that newcomers to the U.S. can now apply for credit cards, apartments, loans and other credit products by using their international credit history. Once you use your international credit history to get a credit card or other credit product here, you can start to build a U.S. score. Learn more here.

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