An unsecured credit card does not require you to put up cash as collateral. With an unsecured card, you can borrow up to a certain amount and make monthly payments of principal and interest. Borrowers who have well-established credit normally use an unsecured card as opposed to a secured credit card.
How the Card Works
The process of applying for and receiving an unsecured credit card is straightforward. You can find applications online, in print publications and through unsolicited mail. Card providers want your basic contact information, income and debt payments.
A review of your credit history is a major factor in an approval decision. Specific requirements vary, but a good or excellent credit score and adequate income to cover debt payments are common.
Pros and Cons
Relative to a secured card, the primary advantage of an unsecured credit card is the lack of collateral required. The lender deems you credit-worthy if you meet income and credit rating standards. Therefore, you don't have to offer collateral against the ability to borrow. You risk no personal financial assets if you fail to repay your credit balance.
If you don't repay debt on an unsecured card, you risk negative marks on your credit report. Lenders may suspend your ability to borrow if you miss multiple payments.
Borrowers who haven't established a credit history sometimes have to start with a secured credit card. Wells Fargo explains that with a secured card, you deposit funds equal to your credit limit in the bank. This cash reserve protects the lender and enables you to gain access to credit that you can't get without an established history.
People who have recently gone through bankruptcy also find it difficult to get an unsecured credit card. A bankruptcy alerts lenders that you have struggled to repay debt in the past. Credit card expert Beverly Harzog reported in a December 2014 article that you typically have to rebuild your credit with a secured card before working your way up to an unsecured card.
It usually takes about one year of consistent, on-time payments on a secured card to reestablish credit and get an unsecured card, according to a May 2014 Bankrate article.