What is an Unsecured Credit Card? How to Apply & Build Credit

What Is An Unsecured Credit Card

Unsecured credit cards are available without putting down any money as a deposit to secure your credit line. When you spend with an unsecured card, you borrow money from the credit card issuer. 

You need to repay at least the minimum amount due each month, or you will face late fees or other penalties. In this article, we’ll dive into the typical features of unsecured cards, as well as how to apply, approval tips, and how to build credit over time with responsible use.

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Typical Unsecured Credit Card Features

Unsecured credit cards are a popular choice because you don’t need to shell out a deposit to start using them. However, understanding how they work is crucial to manage them wisely and avoid financial trouble. Let’s begin by examining some of their key features.

Credit Limits

A credit limit is the maximum amount you can borrow from your credit card. It is a cap or upper limit on how much you can spend using the card.

Credit card companies decide your credit limit when you apply for a new credit card. They look at your credit history, which is a record of how you’ve managed credit in the past. 

If you have bad credit, it means you’ve had some trouble managing debts or bills. Because of this, companies will likely be cautious and give you a lower credit limit, at least initially. They do this to reduce their risk in case you have trouble paying back the money you borrow. 

GenerationAverage Credit LimitAverage Credit Score
Gen Z (18-26)$12,899680
Millennials (27-42)$27,533690
Gen X (43-58)$38,665709
Baby boomers (59-77)$41,906745
Silent Generation (78+)$32,812760
All Generations$29,855715
Experian 2023 Data: Credit Limits and Credit Scores.

However, using your unsecured card wisely by making payments on time can help improve your credit over time, and the card issuer may be willing to increase your limit.

Your credit limit impacts your credit utilization ratio (CUR), which is how much of your credit limit you actually use. For example, if your credit limit is $1,000 and you spend $500, your CUR is 50%. Your CUR is a significant factor in your credit score because it tells lenders how risky or safe it is to lend you money. 

It’s best to keep your utilization low, ideally under 30%. If your limit is $1,000, try to keep your unpaid balance below $300. This can help improve your credit score, which may make it easier to qualify for loans and better credit cards in the future.

Some credit cards offer optional overdraft protection. This means the card still allows you to buy what you need (up to a point) even if you spend more than your limit. But be careful because overdrafting can still lead to extra fees. Overdraft protection may move money from another account to cover your additional spending.

Charge cards, including those from American Express, have no preset spending limits (NPSLs), but you need good credit to qualify. They let you spend a lot, but you need to pay it all back when it’s due each month. American Express has a special option called “Pay Over Time” that sets a limit on how much you can owe at once and charges interest on your unpaid balances.

Interest Rates and Fees

When you use an unsecured credit card, especially if you have bad credit, there are several types of fees and interest rates you should be aware of:

  • Annual fees: These are charges you pay each year for using the card. Some cards have this fee, including many that offer additional perks or those that cater to consumers with poor credit. They may range from $29 to several hundred dollars.
  • Late fees: You’ll have to pay a late fee if you don’t pay your credit card bill on time. This fee can be as high as $41, which is one of many reasons it’s important to pay your bills when they are due.
  • Monthly maintenance fees: Some credit cards charge a fee every month just for having the card. This is common with subprime cards for people with bad credit. Cards usually waive this fee during the first year of ownership.
  • Signup fees: You may have to pay an upfront fee when you sign up for a subprime unsecured card. These fees may exceed $100 in some cases.
  • Cash advance fees: You’ll pay a cash advance fee if you use your credit card to take out cash. This fee is usually 3% to 5% of the amount you withdraw, plus any ATM charges that apply. Some subprime cards waive the transaction fee for the first year, and some delay how soon you can start taking cash advances.
  • Fees for credit limit increases: Some cards charge a fee every time they increase your credit limit. This fee can vary depending on the card issuer, but it may be 25% or higher. Cards that resort to these fees are not ideal.
  • Foreign transaction fees: Many credit cards charge this fee when you use your card to make purchases in another country or in a foreign currency. This fee is usually 3% of the amount of each transaction.

Credit cards express interest rates as an APR, which stands for Annual Percentage Rate. This rate indicates the cost of borrowing money on the card over a year. Issuers determine your APR based on your credit score, which reflects your past financial behavior.

APRs typically range from 10% to 36%. A high credit score suggests that you’re a low-risk borrower, which may qualify you for a card with a relatively low APR. Conversely, a low credit score indicates higher risk, which can mean you only qualify for credit cards with high APRs. 

When you apply for a credit card, be aware of fees and interest rates. Understanding them can help you better manage your credit card and avoid unnecessary costs.

Rewards and Incentives

This chart includes some common inducements that can make unsecured credit cards more attractive and financially beneficial.

Signup BonusesThese are rewards you get for opening a new credit card and spending a certain amount of money within the first few months.Provides extra value early on
Introductory 0% APRA temporary 0% interest rate on purchases and sometimes balance transfers for a set period after opening the accountHelps save on interest costs, making large purchases more manageable without extra fees
Cash BackThe card returns you a percentage of the amount you spend on purchases.Provides straightforward, tangible rewards that can reduce the net cost of purchases
PointsYour purchases earn points that you can redeem for merchandise, gift cards, travel, and more.Offers flexibility in how you use your rewards, often with bonus points for certain categories
MilesSimilar to points, but specifically geared toward travel-related purchasesIdeal for frequent travelers; miles can be used for flights, hotel stays, and other travel expenses
Automatic Credit Limit ReviewsSome credit cards periodically review your account to determine if you qualify for a credit limit increase based on your usage and payment history.Helps improve your credit utilization ratio if you receive a higher limit, potentially boosting your credit score while giving you more spending flexibility

In addition to these rewards and incentives, many of the better credit cards provide numerous benefits, especially for travel and consumer protection.

How to Apply for an Unsecured Credit Card

Applying for an unsecured credit card is straightforward, but it helps to know what to expect. I’ll discuss the basic steps, including understanding the eligibility requirements, selecting the right card for your needs, and navigating the application process.

Common Eligibility Requirements

You’ll need to meet certain criteria and provide some important documents when you apply for an unsecured credit card. Aside from credit score, the eligibility standards are similar for most unsecured cards, but the details may vary by issuer:

  • Age: You must be at least 18 years old to apply for a credit card in most states. But in some states, you need to be 19 or have a co-signer if you’re younger.
  • U.S. Citizenship or Residency: Many credit card companies require you to be a U.S. citizen or a permanent resident to apply. This helps ensure the issuer can easily contact you and legally collect debts if necessary.
  • Income: You need to have a regular income to show that you can pay back any money you borrow. Credit card companies may ask for details about your job and your total income in relation to your housing expenses and debts.
  • Credit History: Your credit history may be decisive in the application process. It shows how you’ve managed debt in the past. Getting approved will be more challenging if you have a bad credit score.
  • Identification: You’ll need to provide identification, such as a driver’s license, passport, or another government-issued ID. Federal law requires financial institutions to positively identify prospective customers.
  • Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN): In the United States, you usually need to provide your Social Security number. Some issuers also accept an ITIN.

Credit card issuers collect this information via online forms or dialog boxes. The whole process can take fewer than five minutes.

Choosing the Right Card

You may need some pointers to help you compare different credit cards. The best approach is to systematically review each candidate card on a feature-by-feature basis. Here are some things to look out for:

Interest Rates (APR): Check the annual percentage rate (APR) to understand how much it will cost to maintain a balance.

Fees: Look for any annual fees, late fees, cash advance fees, or foreign transaction fees.

Rewards and Benefits: Consider what type of benefits and rewards (if any) the card offers (cash back, points, travel perks) and if they match your spending habits.

Credit Limit: Assess the credit limit to ensure it meets your spending needs and you can manage it responsibly.

Customer Reviews: Read reviews from the issuer to gauge the card’s reliability and the quality of customer service.

Required Credit Score: Understand the credit score requirements to gauge if you are likely to qualify for the card.

Reporting to All Credit Bureaus: Check if the card reports to all major credit bureaus (Experian, Equifax, and TransUnion) to help you build credit.

Grace Period: Look for the presence of a grace period, which is the time you can pay your bill for purchases without incurring interest charges.

I want to emphasize the importance of reviewing a card’s membership agreement before applying. It contains all the relevant terms and conditions that explain what you agree to when you accept the card. Knowing this helps you avoid unwelcome surprises.

You’ll also find details about all the fees and any actions that may cost you extra money. Be alert: Sometimes, credit card companies change their terms, so understand how the issuer will communicate these changes to you.

Verify the presence of a grace period (typically 21 to 28 days) for purchases, as some cards omit this feature. The grace period is an interest-free interval between the statement end date and the payment due date. Without it, you would begin accruing interest on purchases on the transaction date (which is normal for cash advances). That’s a nasty sucker punch, and only the card agreement will reveal it.

Completing the Application Process

Credit card issuers strive to make the application process fast and easy. Here are the steps typically involved:

  1. Find the Right Card: Use comparison charts and online review sites to select a card that fits your needs based on fees, interest rates, and rewards.
  2. Gather Your Information: Have your ID, Social Security number, income details, and any required documents ready.
  3. Fill Out the Application: You can do this online. Enter all your information accurately to avoid delays.
  4. Submit Your Application: Review your information, then submit your application. The credit card company will review it and most likely perform a hard pull of your credit report from one or more of the credit bureaus. In most cases, the issuer will give you an immediate decision, but it also may alert you that the process will take longer.
  5. Sign the Agreement: If approved, e-sign the online agreement. Your card should arrive in seven to 10 days.

As mentioned, the issuer will perform a hard credit pull to check your credit history when you apply for an unsecured card. This may temporarily impact your credit score.

Try to only apply for one card at a time. Multiple hard pulls within a short period can damage your credit score. It’s best to wait six months between applications.

The issuer must send you a written Adverse Action Notice (AAN) if it rejects your credit card application. The notice tells you why you were not approved. It could be because of your credit score or other reasons. The notice must tell you what information the issuer relied on to help it decide. The notice also explains how you can get a free copy of the credit report and how to fix mistakes in your report.

You can take several actions if the issuer declines your application. The first task is to understand the reasons behind the decision, which is the job of the AAN. 

If you believe your credit report contains errors that hurt your approval chances, fix it. You can dispute items on your own or hire a credit repair company to do the work for you. Removing derogatory mistakes from your reports can boost your credit score right away.

Experian dispute screenshot
Consumers can dispute items on their credit reports online. Source: Experian

It would help to address any valid issues that are keeping your credit score low, such as late payments or high unpaid balances. Once you’ve improved your credit, you can try to apply for a card again. You may have a better chance of getting approved. 

How Your Credit Affects Your Approval Odds and Terms

Your credit score plays a big role in the credit card approval process and in what kind of terms the issuer offers. Let’s look at how this works and what it means for the types of cards for which you can qualify.

The Types of Cards You Qualify For

Your credit score is a number that lenders use to determine how risky it is to lend you money. It can affect your chances of qualifying for different types of credit cards. Credit scores range from 300 to 850. The two leading credit score vendors are FICO and VantageScore.

Issuers see you as a high risk if your credit score is low. Because of this, having a low score can make it difficult to acquire an unsecured credit card. Unsecured cards don’t require a deposit, so issuers must trust that you will pay back your debt.

credit score categories

When issuers see you as high-risk, they are less likely to approve you for unsecured cards. They may offer you cards with high interest rates and fees or a secured version, which requires a security deposit.

Naturally, issuers welcome applicants with good to excellent credit scores. Approval is much easier, and the card should offer relatively attractive terms. You may qualify for high-quality cash back and travel cards offering generous rewards and many benefits. However, you could still have to pay a substantial annual fee to get the cream of the crop.

Your Credit Limits and Interest Rates

Your credit score is crucial when credit card issuers determine your credit limit and interest rates. A higher credit score can get you a higher limit and lower interest rates because it tells the lender you’re good at managing your money. You can learn more about how credit card companies determine credit limits here.

The following is a chart that shows how different credit scores impact the interest rates and credit limits on unsecured credit cards:

Subprime (Low)High APRs (e.g., 27% to 36%): Higher interest rates because you’re a bigger risk. This means borrowing will cost you more.Lower limits (e.g., $300 to $1,000): Due to higher perceived risk by credit card issuers
AverageModerate APRs (e.g., 18% to 27%): APRs are lower than subprime rates but not as low as prime rates.Medium limits (e.g., $1,000 to $5,000): You can access medium credit limits, offering more flexibility than subprime but less than prime.
Prime (High)Lower APRs (e.g., 10% to 18%): You enjoy lower interest rates, making borrowing cheaper if you carry a balance.Higher limits (e.g., $5,000 and up): You qualify for the most generous credit limits due to high trust levels from issuers.

Now that you know how credit scores can impact your credit card terms and limits, I’ll discuss some strategies to secure better rates by improving your credit scores.

Building Credit With an Unsecured Credit Card

Using an unsecured credit card responsibly is a great way to build your credit score.

Issuers keep track of how you use your credit cards. Every month, they send this information to at least one of the three major credit bureaus — the organizations that create your credit reports.

The dominant credit scoring model, FICO, uses five weighted factors to determine scores:

  • 35% Payment History: Making payments on time is the most important part.
  • 30% Amount Owed: This includes your credit utilization.
  • 15% Length of Credit History: How long you’ve had credit.
  • 10% New Credit: How often you apply for new credit.
  • 10% Types of Credit Used: The mix of credit cards, loans, and other lines of credit.

If you pay close attention to all of these categories, chances are you will maintain higher scores. Let’s look at the most important actions you can take.

Never Miss a Payment

Your payment history is the biggest part of your credit score, making up 35% of it. When you pay your credit card bill on time, it shows you are dependable and can manage your money well. But what exactly does it mean to pay on time? You need to know the payment due date and minimum amount due to avoid triggering late fees.

The payment due date is the last day you can pay your credit card bill on time. If you miss this date, you will likely have to pay a late fee, and payments that are 30-plus days past due can severely hurt your credit score. The date is the same every month, so it’s easy to remember once you get used to it.

The minimum required payment is the smallest amount of money you must pay on your credit card bill to keep your account in good standing. It’s usually a token percentage (about 5%) of your total balance. 

Paying just the minimum allows you to avoid late fees, but it’s better to pay more if you can. If you only pay the minimum, you may end up spending a lot of interest on the remaining balance, and it can take a long time to pay off your debt.

Paying on time builds trust with issuers and credit bureaus. They see that you’re good at repaying what you borrow, which can help you earn a better credit score, higher credit limits, and lower interest rates.

To ensure you send out timely payments, you can set up automatic payments or reminders for yourself.

You can also have the credit card send you alerts when payment is due. These precautions can keep your credit score healthy and avoid late fees.

Keep Your Credit Utilization Low

About 30% of your FICO score comes from how much money you owe. A key factor here is your credit utilization ratio (CUR), which is the relationship between your unpaid credit card balances and their limits. This applies to each card separately and all your cards combined.

Your CUR strongly influences your credit score. It’s best to keep this ratio under 30%. The closer you can get to 1%, the better for your credit score. A low CUR shows you’re not maxing out your credit cards, which makes you look like a responsible borrower.

Ideally, you should pay off your entire balance each month to avoid interest charges. However, if you need to finance a purchase over time, focus on reducing your balance as quickly as possible.

Make sure to pay on time. With each large payment, your CUR improves. Once your CUR is back in the safe zone, it can help raise your credit score.

This chart gives an example of how to calculate CUR:

credit utilization ratio table

Keeping your unused credit cards open can help your CUR. Closing a card reduces your available credit, which raises your CUR, especially if your other cards carry balances. Your credit score may sink if your credit utilization increases after closing a card. The drop in your score depends on how much higher your utilization rate goes.

Monitor Your Credit to Ensure Accuracy

It’s wise to monitor your FICO score. About 90% of lenders rely on FICO scores. When you apply for credit, the lender will likely check your FICO score instead of others.

Get Your FICO Score

You may see many ads offering free credit scores, but remember, these are usually not FICO scores. These free scores can help you learn about your credit, but they are educational, not the ones issuers use to decide whether to approve your credit card application. Each credit bureau — Experian, Equifax, and TransUnion — keeps its own record of your credit history and calculates a FICO Score. 

Credit Monitoring Services

You can use a credit monitoring service to track your credit reports and scores that the credit bureaus publish. These services alert you to any changes or unusual activity, such as new credit inquiries, accounts opened in your name, changes in account balances, or potential signs of identity theft. They can be an important tool for managing your financial health and protecting your identity.

You can visit myFICO.com to see your FICO score and get a report from Equifax for free. If you want more detailed information, you can pay for the Advanced or Premier plans at myFICO.com. These plans charge a monthly fee but provide access to your credit reports from all three bureaus and additional credit management tools.

Other noteworthy credit monitoring services include:

  • Experian IdentityWorks: Experian offers extensive credit monitoring services, including access to your Experian credit report and FICO scores and monitoring for your personal information on the dark web.
  • Equifax Credit Watch: Equifax provides comprehensive monitoring of your Equifax credit report, along with alerts for key changes and identity theft protection.
  • TransUnion Credit Monitoring: This service from TransUnion offers instant alerts on critical changes to all three of your credit reports that can help you spot signs of fraud.
  • Credit Karma: While not a traditional credit monitoring service, Credit Karma provides free access to your credit scores and reports from TransUnion and Equifax, along with alerts about important changes.
  • LifeLock: LifeLock offers identity theft protection along with credit monitoring from one or all three of the major credit bureaus, depending on the plan you purchase.

These services vary in features, including the number of bureaus they monitor, the types of alerts they provide, and additional services like identity theft insurance. Depending on your needs, you may choose a service that monitors all three bureaus comprehensively or one that offers basic monitoring with additional identity protection tools.

DIY Credit Monitoring

You can also monitor your credit yourself for free. AnnualCreditReport.com provides free access to your credit reports from all three bureaus every week.

Before 2020, you could get one free report from each bureau per year. However, the bureaus allowed people to access their reports every week during the COVID-19 pandemic. This policy was extended to give consumers more frequent updates and help them stay on top of their credit.

Monitoring Via Credit Cards

Many credit card companies now offer a great benefit — they give members free access to their FICO Scores. Some even provide the FICO scores from each of the three major credit bureaus.

credit bureau logos
A number of credit card issuers provide cardholders with FICO scores from the major credit bureaus.

Typically, your scores from these three bureaus should be similar. It could be a warning sign if you notice that one score is considerably different from the others. This discrepancy may indicate there’s an error on one of your credit reports.

It’s important to know your credit scores and to check your credit reports at least once a year. This can help you catch mistakes and ensure that your information is accurate and updated.

Unsecured vs. Secured Credit Cards

Secured cards may be an ideal choice for people with low credit scores or who have yet to build much credit history. Except for the mandatory deposit, they operate the same as unsecured cards.

Secured Cards Require a Deposit

A secured credit card requires you to pay a deposit. The minimum deposit is often between $49 and $200, and the amount you deposit is typically the same as your credit limit. This means if you deposit $300, your credit limit will also be $300. The deposit is a way for the bank to protect itself if you can’t make your payments.

The issuer keeps your deposit in an insured escrow account. You’ll get your money back when you close your credit card account (or upgrade to an unsecured card), but only if you’ve paid off your balance completely. 

You should get back 100% of your deposit if you’ve always paid on time and your balance is zero when you close the account. This system protects both you and the card issuer if there’s ever a missed payment.

Your deposit is not there to use for monthly payments. Using your deposit to cover your bill is not considered responsible financial behavior. 

If you fail to make a payment and the issuer has tapped into your deposit, it will count as a late payment. Late payments can hurt your credit since payment history is a big part of your score.

secured card deposit facts

Even though your deposit acts as a safety net, you should make all your payments on time. This helps you build good credit and ensures you get your deposit back when you close your account.

Unsecured credit cards don’t involve a deposit. Even if you have poor credit, you still qualify for an unsecured card, but it can be harder compared to a secured card.

When it comes to buying things, both secured and unsecured credit cards work the same way. You can use them to shop in stores, online, or to pay bills, and you need to pay back at least some of what you spend each month.

Both Have Credit Building Potential

Both secured and unsecured credit cards can help you build your credit when you use them responsibly because card issuers report your monthly activity to at least one credit bureau. 

Timely payments can help improve your credit score because your payment history is the most important factor in your credit score calculation. By using either type of card wisely and making payments on time, you can build or improve your credit.

But secured cards may provide some specific advantages for those who want to improve their credit scores:

  • Easier Approval: Since secured cards require a deposit that acts as collateral, they are easier to acquire, especially if you have bad credit or no credit. Many issuers will upgrade you to an unsecured card after a period of timely payments.
  • Lower Risk: Your deposit reduces risk, making it more likely the issuer will offer you a card. This allows you to start building credit even if other types of credit are not available to you.
  • Reporting to All Major Credit Bureaus: Secured cards typically report to all three major credit bureaus, which is optimal for building credit. This is only sometimes the case with unsecured cards, especially those from smaller issuers.
  • Controlled Spending: Your initial credit limit on a secured card is usually equal to the deposit you made. This naturally helps keep your spending in check, which can prevent you from accumulating debt that’s hard to pay off. Keeping your debt low is another key factor in your credit score.

Using a credit card responsibly sets a strong foundation for your credit history. As you continue to make on-time payments and manage your balance well, your credit score will improve, potentially allowing you to qualify for better credit offers in the future.

How to Know Which Type of Card is Best for You

Choosing the right card type depends on several factors, including your financial situation and credit score. The following chart can help you decide whether to go with a secured or unsecured credit card:

Credit ScoreIdeal for individuals with low or no credit scores. Approval is more likely because of the security deposit.These are better suited for those with medium to high credit scores, where approval is likely without a deposit. Unsecured cards for bad credit are generally more expensive than secured cards.
Financial StabilityRequires a refundable deposit. Good for those building or rebuilding credit.No deposit is required, so approval implies a certain amount of stable financial standing with less upfront financial commitment.
Credit BuildingReports to all three major credit bureaus, aiding in credit improvement.May only report to some bureaus; reporting varies by issuer, especially smaller ones.
Access to CreditCredit limit typically matches the deposit amount, which can limit purchasing power but is effective for controlled spending.Credit limits are based on creditworthiness and can be higher, offering more purchasing flexibility.
UsageBest for starting out or recovering from financial setbacks. Can help establish or rebuild credit effectively.Suitable for everyday spending with a stable financial history, offering more features and benefits like rewards.
Refundability of Fees/DepositsDeposits are refundable upon closing the account, assuming the balance is paid in full.Fees charged on subprime unsecured cards, such as high signup and annual and monthly payments, are not refundable.

You may consider a secured card if you have poor credit because deposits are refundable, whereas the high fees that subprime unsecured cards charge are not. Some unsecured cards can easily charge fees of $150 or more per year. 

Unsecured Credit Cards Are Foundational Financial Products

Unsecured credit cards are basic financial tools that many people use every day. Unlike secured cards, they don’t require a deposit.

If used wisely, unsecured credit cards can help you manage your daily expenses, earn rewards such as cash back or points, and build your credit history. Since they usually offer higher credit limits and more benefits, unsecured cards are a popular choice among people with stable financial histories and good credit scores.

In all cases, you must use your credit card responsibly to extract the greatest credit-building benefit. This means paying your bills on time, paying the entire monthly balance whenever possible, not spending more than you can afford, and keeping track of your purchases. By doing so, you can avoid high interest charges and late fees while improving your credit score over time.