Using a credit card responsibly helps build good credit, which plays a critical role in helping you reach financial milestones such as buying a house. However, not all credit cards are created equal. Depending on your credit score, you might benefit from shopping around different types of credit cards.
If you’re looking to open a new line of credit, find out how to choose between secured and unsecured credit cards.
What Is an Unsecured Credit Card?
The definition of an unsecured credit card is simple: It’s a credit card that doesn’t require a security deposit, or collateral, to open an account. Without collateral — such as a house, a car or cash deposit — lenders risk not getting their money back if the borrower defaults on payments.
Because unsecured debt is riskier for lenders, not everyone qualifies for unsecured credit cards. Borrowers typically need good credit, an established credit history and other favorable factors such as strong household income to successfully apply for an unsecured credit card.
Interest rates for unsecured credit cards vary depending on creditworthiness. For example, unsecured credit cards for people with fair credit scores might have APRs ranging from 10 percent to 15 percent higher than that of cards geared toward people with good credit.
Secured vs. Unsecured Credit Cards
Though unsecured credit cards are more common, a secured credit card is more accessible to borrowers with limited credit history or subprime credit. By putting down a refundable security deposit on your secured credit card, you can borrow a limited amount of money to start making on-time payments and build credit. However, credit lines for secured credit cards can start at amounts as small as a few hundred dollars, whereas unsecured credit cards tend to come with higher lines of credit. Lenders also tend to increase your credit limit more easily, and you might receive additional credit card offers on a frequent basis when you use your unsecured credit card responsibly over time.
Borrowers who initially don’t qualify for unsecured credit cards can work to improve their credit score using a secured credit card. When the time comes, you’ll be able to refund your security deposit and apply for an unsecured credit card. By graduating from a secured credit card to an unsecured credit card, you’ll have established your creditworthiness, which can open financial doors to greater opportunities down the line.
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