What is an Unsecured Credit Card?

An unsecured credit card is one that is not connected to a savings deposit account. The majority of cardholders in the United States have at least one unsecured credit card. They are basically pre-approved loans that allow a person to spend money up to a certain limit without actually having the cash. Credit companies decide how high of a spending limit to extend to people based on their prior credit histories. Individuals enter contracts to repay any money that is charged on their cards, either in the form of a lump sum within one month or through smaller monthly payments.

There are generally costs associated with using an unsecured credit card. The borrower agrees to pay back a predetermined interest rate in addition to the amount of money that is charged on the card. Interest rates vary, and they may raise dramatically if a bill is paid late or temporary low-interest promotional period ends. However, interest does not accrue if the balance is paid off in full every month. Fees are also commonly charged for going over the credit limit or paying the bill late. Most fees and interest can be avoided by using an unsecured credit card wisely.

Unsecured credit cards are typically given to people with good or average credit ratings. Individuals who have poor histories of repaying debt tend to have difficulty being approved for one. This is because there is no security in place for the lender, in the event that the borrower stops paying his or her credit card bill. Loaning unsecured money to someone with a low credit score would pose a high risk to the financial institution.

Instead, these individuals are usually offered secured credit cards, which have more limitations. Holders of secured credit cards must deposit a certain amount of money into an account that is controlled by the credit company. This amount may be up to 150 percent of the credit limit. Money is taken out of the account to cover charges if the individual fails to pay his or her bill. Secured credit cards are also more likely to have high annual fees and high interest rates. The benefit of having them is that they can help raise a low credit score if used responsibly.