What Is an Unsecured Credit Card?

Unsecured credit cards are the most common type of credit card. In fact, most of the time, when people apply for a new credit card, they are applying for unsecured credit. “Unsecured,” in this case, means that the debt is not secured by collateral, such as a deposit that the lender or card issuer can keep if you fail to make payments. Consider some basic information to help you understand what an unsecured credit card is and how it works:

How unsecured credit cards work

Unsecured credit cards require no collateral, so the terms of the debt are based upon the borrower’s credit rating, ability to pay, application information and other factors. Because the debt is unsecured, this type of debt is typically slightly riskier for lenders to issue.

Unlike car loans or mortgage loans, which are “secured,” or backed by collateral — a house, a car — that helps ensure that the lender can get some of their money back in the event of nonpayment, unsecured credit card debt has no collateral.

Unsecured credit card interest rates

Credit card borrowers promise to repay the money, and they pay interest on the debt. Credit cards tend to have higher interest rates than car loans or mortgages, in part because credit card debt is riskier for banks.

This is also why unsecured credit card APRs are risk-based and may vary among borrowers — borrowers who have better credit histories are less risky for banks to lend to, and so these borrowers tend to get lower APRs. Payment terms do not vary much.

What do you need to apply for an unsecured credit card?

An unsecured credit card usually requires a higher income level and credit score than a secured card. The exact numbers vary by card issuer, but if you get turned down for an unsecured card, you can apply for a secured card and work on building your credit until you qualify for an unsecured card.

Alternatives to unsecured credit cards

Although unsecured credit cards are the most common form of credit cards, not everyone can qualify for this type of card.

If you have limited credit history or are rebuilding your credit, you might want to consider a secured credit card. A secured credit card may give you the ability to borrow only a certain amount of money (starting with as little as a few hundred dollars) that you secure up front by paying a security deposit.

Over time, as you pay your bills and use your new secured credit card and other loans responsibly, you may rebuild your credit and get to the point where you’re ready to move on or “graduate” to an unsecured credit card. If you use your Discover secured card responsibly, after 7 months, Discover will begin automatic monthly account reviews to see if you qualify to convert to a standard, unsecured card and get your deposit back.¹