Unsecured credit cards are credit cards meant for people with a less-than-perfect credit score. Such cards do not require any security deposit, as required in the case of a secured credit card. However, just because there is no security deposit, it does not mean that unsecured credit cards are easy to get. Approval requirements are a lot tougher than what one would see with a secured credit card.
Fees and interest rates of unsecured credit cards
The fees and interest rates of unsecured credit cards are high because there is no safety net of a security deposit. The risk level of lending credit to a customer is quite high. The spending limit on the unsecured credit card is also somewhat low. Normally, one can get a cad with a $200 or $300 limit.
Given all these facts, it becomes clear that unsecured credit cards are not a long-term solution. They should only be used when you absolutely need that extra line of credit. Think about financial emergencies or medical emergencies when you have exhausted all your conventional finance options and still need to make a bill payment. When nothing else works, you can get an unsecured credit card for a few weeks or months to fill the gap. An unexpected car breakdown leading to high repair expenses can also be another emergency event.
When to get unsecured credit cards
Besides emergencies, unsecured credit cards also serve another purpose. They can be used to build your credit score. If you have been through a financially tough situation or if your credit score has deteriorated over the years, you need to transact, pay bills on time, and start building a history of positive financial behavior. Conventional credit cards might be out of your reach because they are offered to people with good credit scores. But, unsecured credit cards that are offered to people with a bad credit and that report the account information to credit bureaus are a great way to get back on your feet and move upward. Use the unsecured card to make purchases. Pay the monthly card bill on time and you will start to notice an improvement in your credit score.
Now that you have a good background of the concept of unsecured credit cards and how they can help you, the next question you would ask yourself would be how to find good unsecured credit cards and how to select the best one. There are many well-known companies such as Discover, Capital One, Credit One, etc. that offer unsecured credit cards. While researching various unsecured cards and comparing them, you must focus on the following metrics:
- Interest Rate
You want to know what APR you will have to shell out while making EMI payments. Unsecured cards will have a high number than secured and regular credit cards.
- Credit Limit
Perhaps just as important as the APR is the credit limit. It defines how far you can go in terms of spending using your new unsecured credit card. While examining the credit limit, you should also explore if there is an option to increase the limit down the line. Some cards offer you that option once you have paid a certain number of monthly bills.
- Annual Fees
Many credit cards charge an annual fee. This varies from company to company and card to card, but do keep an eye on this one. If you plan to use your unsecured card very sparsely, then understand that you could be paying fees every year irrespective of how much you use your card, or whether you use it at all. It will cost you money just to hold the card.
- Other Fees/Charges
There are many types of fees and charges. Read the fine print in the terms and conditions to familiarize yourself with these fees. Many a time, these fees are charged to your account balance. Hence not only are they outstanding, but they can attract interest charges if not paid on time.
- Credit bureau reporting
This is an extremely important feature to look for if you are planning to use your credit card to improve your credit score. Make sure that the transactions and account information on your unsecured credit cards gets reported to Experian, Equifax, and TransUnion. These are the three biggest credit bureaus in the country and your credit report/score will get positively affected if the information gets transmitted to them.
- Foreign Transaction Fee
If you are planning to travel abroad and use your card, purchase something from a non-US website, or conduct any kind of foreign transaction, then be prepared to pay foreign transaction fees in addition to the normal product price. Almost all cards have this fee, so it is very difficult to avoid it.
While this is not a deal breaker, it would always be nice to have a rewards system with any credit card. If you can get cashback on everyday purchases or at gas stations, then that is a bonus. Some unsecured cards may offer such a rewards program but many don’t. Either way, it won’t hurt to look for this feature in a card that you are researching.
- Qualification/Approval Process
Conventional credit cards normally perform a credit check on your file before processing your application. There are two types of credit checks, a basic soft credit check and a detailed hard credit check. The problem with a hard credit check is that it negatively impacts your credit score. So, if you are looking at unsecured cards and if your credit is already in bad shape, then you could do without a hard credit check. While researching credit cards, look for details about the approval process. Ask the company if they perform a hard credit check or a soft one (or none at all!).
Let us now look closely at some of the best known secured cards:
- Credit One Bank Platinum Visa
For a maximum annual fee of $75, a person with bad credit can get an unsecured credit card from Credit One for a credit limit of $300. This card does not charge any one-time application fee or a monthly fee. All you have to pay is the annual fee. Keep in mind that the $75 amount for the annual fee is only for the first year. That amount can go up to $99 in subsequent years. The amount of the fee is dependent on your creditworthiness. So essentially, for $75, you are getting $225 of credit.Interest rates are above 20% with the Credit One card (20% to 25% range). If your credit is in fair shape, you might be able to get away with a rate at the lower end of the range. However, if your credit is not in good shape, then the interest rate will be on the higher end of the reference range.Credit limit increases are possible with this card down the road. But, you will have to establish a track record of timely payments for a few months before any increase in the limit happens. Lastly, the Credit One card does have a cashback program where you can receive 1% cashback on select purchases.Overall, the Credit One Bank Platinum Visa card is a reasonably good unsecured credit card for someone with bad credit. It has high fees and interest rates, but that is to be expected with an unsecured card. The rewards program sweetens the deal.
- Capital One Platinum
The Capital One Platinum credit card is an unsecured credit card with no annual fee. You read it right. If you do not like paying annual fees then read on. The credit limit on this card is also $300. But, this card is for people with fair credit. So, while you are encouraged to apply, you may get rejected if you have really bad credit.Interest rates on the Capital One card quite high at 24.99% APR. There is no range as was the case with the Credit One card reviewed above. So, while you do not pay annual fees, you pay a pretty high interest rate on any outstanding bills. It is possible to get a higher credit limit after making timely payments every month for the first 5 months. Once you establish a positive record of timely payments, you have a chance to increase your credit limit.The Capital One Platinum card does not come with any rewards or cashback program. Other notable features offered by this card are auto rental and accident insurance, roadside assistance, extended warranty coverage, zero dollar fraud liability, and access to Capital One’s CreditWise platform. Through this platform, you can access your TransUnion credit score and monitor its change as you use the unsecured card.
- Discover It Student Cashback
A student is someone who is just starting to build his/her credit profile. Hence, the young person may not have the best credit scores. The Discover It Student Cashback card gives the student the opportunity to develop positive habits and build a credit score.There is no annual fee with this unsecured credit card. In fact, the card incentivizes good academic performance with a $20 credit for good grades. The card also has a feature whereby students can access their credit scores and learn about how positive behavior improves their credit scores.One of the most talked about feature of the Discover It Student card is the FreezeIt feature. It allows the user to freeze the use of the credit card, something very helpful in the case of theft or loss of the credit card. This can also help prevent fraud, cash advances, etc. Another useful feature is the zero liability for unauthorized purchases.APR varies between 15% and 24%. However, the APR is 0% for the first 6 months. Late payments attract a $37 fee. Cash advances have a fee of $10 or 5% of cash advance amount, whichever amount is greater.
There is a cashback rewards program with this card. Qualifying purchases get cashback of 1% or sometimes even 5%. There is also a feature where Discover will add up all the cashback from the first year of usage and match that cashback. So you get great rewards for using the card in the right places.
- Milestone Mastercard
Milestone Mastercard is an unsecured credit card which charges a yearly fee ranging between $35 to $99 depending on case to case. However, there are no monthly fees or processing fees. For the annual fee, you get a $300 credit limit which then gets deducted by the fee amount. So, you still are left with money to use in whatever emergency situation you are facing.Interest rate with the Milestone Mastercard is not low, APR is high at 23.9%. With such a high rate, it is clear that you do not want to be using unsecured cards for very long. You want to pay off the bill as soon as you can, as 23.9% is not cheap. However, the good thing is that a person with bad credit can get some funding. And, there are unsecured credit cards charging higher APRs, sometimes as high as 27%.The Milestone Mastercard approval involves only a soft credit check. So, you do not have to worry about any dip in your already low credit score. If you plan to use this credit card while traveling abroad or on a foreign website, then you will be pleased to know that the foreign transaction fee is only 1%. Most other unsecured cards charge 3%. The grace period is 25 days after bill due date for a payment cycle and late fees are $37, in line with what most other unsecured cards charge. Milestone Mastercard is another option among unsecured credit cards that you can look at.
So there you have it, all the information about unsecured credit cards along with a brief review of the top ones. You must always remember that unsecured credit cards are a short-term solution. It is always better to build some credit and switch over to a secured or a regular credit card in the long run.