It's important to know how to manage your credit cards once you have them and stay on top of your finances to keep your wallet happy! Whether you're a student, recent graduate or old-school cash consumer finally making the plastic plunge, establishing a credit history is critical to modern living. Without credit, you'll run into expensive roadblocks at every milestone.
Good luck renting a car. Your car, life and home insurance premiums will be higher than the norm. Utilities and cell phone providers might force you to put down a deposit. Finding a bank willing to sell you a mortgage for your new home will be next to impossible. According to a 2015 study by the Consumer Financial Protection Bureau, one in 10 Americans — or about 45 million people — have no credit history to their name. To make sure you don't end up in that pool, it's crucial to act now because establishing a credit history doesn't happen overnight.
FICO, the primary credit scoring system that the major credit bureaus report to, can take up to six months to see your first credit report – longer still to build a good, competitive score. The good news is that everyone starts off with no credit. Credit card companies WANT you to have credit so they can sell you services. That means there are well-walked avenues to help you build credit from scratch — from personal loans to insurance plans. When it comes to credit cards, there are pretty much two major types of cards you can use to rebuild your credit: secured and unsecured. Understanding the differences between the two is key to laying a solid credit foundation, so we hope you find this guide to the best-unsecured credit cards helpful.
Fundamentals of the Unsecured Credit Card
To understand the difference between secured and unsecured credit cards, you have to first understand the basic concept of credit. Credit is pretty much a contractual loan. Revolving credit is something lenders offer consumers in exchange for future repayment, typically with interest. Resulting in a larger payment back to the lender than the amount borrowed. This means every time a credit card company approves a credit card, it's taking a risk on a consumer — you! — who could potentially max out the card and never pay it back. To lower their own risk, credit card companies look at an applicant's financial trustworthiness, primarily through a credit history check. But what if, for whatever reason, you don't have any credit? Here's where the concept of secured and unsecured comes along.
How a secured card is different from an unsecured card
A secured card is backed by some type of collateral, typically a cash deposit. Think of this like a security deposit a landlord requires before you can rent. It functions to reduce the risk to the credit card issuer, so if you end up not paying your bill it has a "safety deposit" it can draw from. For this reason, secured cards are geared toward people with bad or no credit. An unsecured credit card requires NO collateral or security deposit. It's the most common and likely familiar type of credit card out there. For this reason, credit card issuers typically gear unsecured cards toward people with good, well-established credit. So you must be thinking: If you don't have any credit, there's no way to get an unsecured credit card. Not so fast! Just because you don't have any credit does not mean an unsecured card is out of reach.
Landing an unsecured card for bad or no credit is possible but comes with risks
Let's say you have no credit, a few hundred in savings and don't own a car or a home. Putting together enough collateral toward a worthwhile secured credit card might be tricky. Typically, the security deposit is equal to the credit limit you'll be granted, so even if you drained your savings, your credit limit would still be meager. More importantly, it's never smart to drain your savings since you never know when an emergency might strike. A recent Federal Reserve survey found that about 46% of Americans said they did not have an established emergency fund to cover a $400 crisis.
Credit card companies are aware of this and have created unsecured cards for those very people both without any credit nor much available collateral. But what about the higher risk? After all, would you be comfortable giving a stranger without any financial history a loan? Well, there's the catch. Unsecured cards for those without credit typically carry higher fees and interest rates than secured cards (more on this later).
Secured cards are safer to rebuild your credit, but unsecured cards can still do the trick
Any credit card is theoretically good for building credit. Your card issuer typically reports your credit activity to the three major credit bureaus monthly, Equifax, TransUnion and Experian. These credit bureaus then calculate what becomes your FICO credit score. To maximize your score, it's crucial to understand the breakdown of how your report is calculated:
Payment history (35%). Have you paid all your past bills on time?
Amounts owed (30%). How much money do you? The lower your credit utilization ratio (used/available), the better.
Length of credit history (15%). When did you start building credit? The longer the better, typically.
Credit mix in use (10%). What cards, accounts, and do you have? The more diverse the better.
New credit (10%). How many cards did you apply for recently? Even a couple is often a red flag for lenders.
So, as you can see, the type of card does not directly affect your credit. In other words, whether you're using a secured or unsecured credit card doesn't matter. What matters is whether you're paying your bills on time and keeping your credit utilization low — typically around 20%. That being said, because unsecured, "no-credit" credit cards typically come with higher fees and interest rates, it's crucial that you understand these rates so you can anticipate and afford these extra costs. Otherwise, if you're hit with a higher bill than you expected—and you can't pay it back on time—your credit score will pay the price.
The high interest, high fee risks of unsecured credit cards for someone with limited or no credit
When it comes to any credit card you're considering applying for, there are three big criteria to pay attention to (and avoid):
- Too high annual percentage rate (APR). This annualized, fixed interest rate is applied to any balance you carry forward to the following payment period, and ranges from around 15-25%, but those numbers are always changing. For bad credit unsecured credit cards, the risk is not paying back your entire bill and getting hit with a huge interest payment the following month.
- Exorbitant annual fees. This one-time fee is typical to the industry, typically ranging from $25-500. Sometimes this fee is waved the first year. The risk with a high annual fee is not taking advantage of perks offered that offset the fee with value from cost savings and rewards.
- Go over your line of credit. This is how much money you'll be allowed to spend per month. If approved, no credit or bad credit applicants are typically granted a low credit limit. The risk here is going over your credit limit or even using too much of it and hurting your credit score without intending to.
For unsecured, no-credit credit cards, off the bat you should expect a high APR, minimal credit line, few perks and likely an annual fee. That doesn't sound great, but it's the tradeoff for obtaining credit without forking over some collateral. One big perk you likely won't find with these cards is a cash advance. That means if you have an emergency and need cash quick, even if you're willing to take the interest hit down the line, you'll be out of luck.
That being said, most cards carry a high cash-back APR that could put your credit score at risk. It's always best to withdraw directly from your checking or savings account if possible; otherwise, make sure the card you choose has a low cash-back APR.
Applying for the Right Card
Online is the best place to apply for an unsecured credit card without credit
Yes! Reason being, while your credit is the primary data point providers use to assess risk, it's not the only piece of data they are interested in. While it varies from provider to provider, the typical information you'll need to provide includes:
- Driver's license number
- Social Security number
- Date of birth
- Annual household income
The waiting time between application receipt and approval varies from provider to provider. Generally speaking though, the better your credit rating, the faster the response time. So, without credit, be prepared to wait up to a few weeks to hear back. That being said, many cards offer a pre-qualification check, which takes less than a minute and won't affect your (still non-existent) credit score. This is a great, zero-risk way to not waste time waiting for a denial because you'll find out if you qualify instantly.
The more traveled route that consumers take is getting a secured card and after some months to a year of on-time payments, graduating to a better-unsecured card. Still, whether the card you're using is secured or unsecured, after six months to a year of good credit behavior, your credit card issuer will likely approve you for a better-unsecured card with lower fees and higher credit limit. It's important to know how to manage your credit cards once you have them, and stay on top of your finances to keep your wallet happy!