Unsecured Credit Cards: A Retrospective Look
Credit cards have become an integral part of our daily lives. They offer convenience, rewards, and help us build credit. With the rise of online shopping and contactless payments, credit cards have become even more essential. However, not all credit cards are created equal.
In this post, we will take a retrospective look at unsecured credit cards – what they are, how they work and their pros and cons.
What is an Unsecured Credit Card?
An unsecured credit card is a type of credit card that does not require collateral to be approved for the line of credit. This means that the lender does not require any security in case you default on your payments.
With an unsecured credit card, you can make purchases up to your available limit without putting down a deposit or pledging any assets as collateral.
How Do Unsecured Credit Cards Work?
Unsecured credit cards work like any other type of revolving line of credit. You receive a certain amount of borrowing power based on factors such as your income, employment history and current debts.
Once approved for an unsecured card, you can use it to make purchases anywhere that accepts the payment network (Visa, Mastercard or American Express) affiliated with your card issuer.
Each month you will receive a statement outlining your balance due and minimum payment required if there is one outstanding. If you choose to carry a balance beyond the grace period given by the issuer (usually 21-25 days), interest will be charged on the unpaid portion until it’s paid off in full or within another set time frame.
Pros & Cons Of Using An Unsecured Credit Card
Like all financial products out there today — from mortgages to car loans — there are both benefits and drawbacks associated with using an unsecured credit card:
Pros:
1) No Collateral Required: Unlike secured loans or secured lines-of-credit where some form of asset is required to back up the loan, unsecured credit cards don’t require any collateral. This means that you won’t have to put down a deposit or pledge your assets in case of default.
2) Build Credit: If used responsibly, an unsecured credit card can help build your credit history and improve your credit score over time. A high credit score opens doors for future loans like auto loans, mortgages and personal loans with more favourable terms and lower interest rates.
3) Rewards & Perks: Unsecured credit cards often come with rewards programs such as cashback or points that can be redeemed for travel, merchandise or other perks. These rewards can add up quickly if you use them regularly.
4) Convenience: Unsecured credit cards offer consumers convenience when it comes to making purchases online or in-store. It also offers protection against fraud if someone were to steal your physical card.
Cons:
1) High-Interest Rates: Unsecured credit cards typically carry higher interest rates than secured lines of credit because there is no asset backing up the loan in case of default. If you do not pay off the balance on time each month, you could end up paying more in interest charges than what was initially borrowed.
2) Late Fees & Penalties: Many unsecured credits will charge late fees if payments are missed by their due date — which adds further costs to using these types of products over the long run.
3) Credit Score Impact: The failure to make timely payments on an unsecured line-of-credit can negatively impact one’s overall credit scores— something that could harm future borrowing opportunities.
4) Risk Of Overspending/Debt Accumulation: With access to easy borrowing power via an unsecured line-of-credit, some people may find themselves spending beyond their means without realizing it until they receive their monthly bill statement showing how much they owe.
Unsecured Vs Secured Credit Cards
As we’ve mentioned earlier, unsecured credit cards don’t require collateral or security to be approved for. Conversely, secured credit cards do require some form of collateral in exchange for approval.
The most common forms of secured credit include a cash deposit (which serves as the card’s initial credit limit), a personal guarantee from someone with good credit history or co-signer on the application who will take responsibility if you fail to keep up with payments.
Secured Credit Cards Pros:
1) Better Approval Chances: Secured lines-of-credit are easier to obtain because they’re backed by an asset and pose less risk to lenders than unsecured lines-of-credit.
2) Build Credit: Like unsecured lines-of-credit, responsible use of secured ones can help build your credit score over time opening doors for future financial opportunities.
3) Lower Interest Rates: Because the loan is backed up by an asset, interest rates on these types of loans tend to be lower than those offered through unsecured products.
Cons:
1) Collateral Required: As mentioned before, securing your line-of-credit means putting down some sort of collateral – usually in the form of a refundable security deposit or personal guarantee. This can be difficult if you don’t have access to funds or willing co-signers/guarantors.
2) Limited Borrowing Power: The maximum amount you can borrow is usually limited by how much secure collateral you have available— meaning that it might not provide enough borrowing power if you need more money.
Which One Should You Choose?
Ultimately, whether you should choose an unsecured or secured line-of-credit depends on your individual needs and circumstances. If building credit is your primary goal then either type could work well; however, if affordability and flexibility are important factors then we’d recommend going with whichever option best suits those needs
Some final considerations when applying for any type of new financial product include researching different offers thoroughly beforehand so that there are no surprises later on down the line. Be sure to read all terms and conditions carefully before signing up too – this will help you avoid any unexpected fees or charges that could result from using these types of products over time.
Conclusion
Unsecured credit cards can be a useful tool for building credit, earning rewards and providing convenience when making purchases online or in-store. However, they do come with higher interest rates than secured lines-of-credit and carry risks like late fees/penalties if payments are missed by their due date.
Secured credit cards offer lower interest rates but require collateral in order to receive approval. This means that you may have limited borrowing power depending on how much secure collateral is available at the time of application.
Ultimately, choosing which type of line-of-credit is right for you boils down to individual needs and circumstances. Do your research thoroughly beforehand so there are no surprises later on down the line – whether it comes as an unexpected fee or charge that could result from using these types of products over time