U.S. News Best Unsecured Credit Cards?
Credit cards are either secured or unsecured. Unsecured cards are the most common and do not require a deposit to open the account; secured cards require a cash security deposit that can be retained by the issuer if the cardholder defaults on payments.
Most credit cards designed for people with fair credit are secured. However, there are a number of unsecured credit cards that can be used to improve or establish your credit.
If you have fair credit, unsecured cards can be risky, as they often do not have the best terms. Interest rates and fees can be high and may do more harm than good. An unsecured credit card can help you improve your credit, but it’s important to understand how unsecured cards work and which are the best ones available.
Best Cards Summary
Capital One QuicksilverOne Cash Rewards Credit Card
Why this is one of the best unsecured credit cards: Consumers with fair to good credit may be eligible for this unsecured card that charges a $39 annual fee. You’ll earn a flat rate of 1.5% cash back, which is on par with some of the top rewards credit cards.
Capital One Platinum Credit Card
Why this is one of the best unsecured credit cards: The Capital One Platinum Credit Card is a solid entry-level unsecured card for those with less-than-stellar credit. You won’t pay an annual fee, and after six months of responsible payments, you’ll be automatically considered for a credit limit increase.
Journey Student Rewards from Capital One
Why this is one of the best unsecured credit cards: For students with limited credit histories, the Journey Student Rewards from Capital One is designed like a crash course in credit cards. You’ll earn 1% cash back on purchases with this unsecured card and 1.25% back for each month payments are made on time. Eno®, the Capital One® assistant, can help you manage your account and keep tabs on due dates.
What Is an Unsecured Credit Card for Fair Credit?
Unsecured credit cards for fair credit are not backed by a cash deposit like secured cards. They are traditional credit cards that can be used to pay for purchases and are subject to interest and late fees.
Unsecured credit cards for fair credit are designed for people who have trouble getting approved for regular cards. They have lower approval requirements, so you may be approved for one even with a fair credit score. They can offer a good opportunity for rebuilding or establishing your credit, but they often have drawbacks like high interest rates and fees.
Unsecured credit cards for fair credit are useful for people who:
Do You Have Fair Credit?
Your credit score is a numerical representation of your creditworthiness. It is one of the factors that lenders use when making approval decisions.
Your credit score indicates how well you pay your debts and how big of a risk you represent to lenders. There are several different credit scoring models in use today, but the most common is the FICO score.
Your FICO score is calculated based on the data in your credit report collected by the three major credit bureaus: Equifax, Experian and TransUnion. That data includes your outstanding debt, payment history, defaults, judgements and bankruptcies.
FICO score ranges are:
- Exceptional (800+)
- Very good (740-799)
- Good (670-739)
- Fair (580-669)
- Poor (579 and below)
If you have a credit score in the fair FICO range, you have fair credit. People with fair credit have little creditworthiness and often find it difficult to obtain a new unsecured credit card.
The Consumer Financial Protection Bureau recommends four ways to obtain your FICO score:
- Purchase directly from MyFico.com for $19.95 (this includes your FICO score from all three major credit bureaus)
- Paid credit-monitoring services
- A nonprofit credit counselor (use a government-approved counselor)
- Your monthly credit card statement, if it is offered as a cardholder benefit
How Do Unsecured Credit Cards for Fair Credit Work?
People with fair credit are somewhat risky for creditors. They have a greater chance of defaulting than someone with a higher score, which is why applicants with fair credit are often denied new cards. Credit cards for people with fair credit are designed to offer a second chance while also protecting the lender against the possibility of default.
Typically, creditors use secured cards to offset their risk. These cards require a cash security deposit on the account, typically 50% to 100% of the credit limit.
If you miss a monthly payment on a secured card, the creditor may use money from the deposit to pay the bill. Most secured credit cards have very low starting credit limits.
With unsecured cards for fair credit, issuers offset their risk by charging high interest rates, steep penalties for late payments and regular maintenance fees. With a higher cost to use the card, issuers make more money upfront in case a cardholder defaults. Like secured cards, unsecured cards for fair credit usually have low credit limits, though they are typically higher than the limits on secured cards.
Benefits of unsecured cards for people with fair credit:
- No initial cash deposit
- Higher credit limits
Drawbacks of unsecured cards for people with fair credit:
- High interest rates
- Potential high annual fees
- Potential monthly maintenance fees
How Can You Choose an Unsecured Card for Fair Credit?
If you have fair credit and are looking for an unsecured credit card, research these key features before applying:
- Annual fee
- Additional fees and charges
- Credit limit
- Ability to increase credit limit
- Penalty APR
- Foreign transaction fee
- Reporting to the three credit bureaus
- Cardholder benefits
For unsecured credit cards, the features with the largest potential impact to your credit and finances are the APR, annual fee and additional charges. These are the features that can make an unsecured credit card expensive to own even with responsible use.
Unsecured credit cards for fair credit typically have APRs that are 10% to 15% higher than traditional cards for people with good credit scores. Carrying a balance on a high-interest card can result in significant interest charges, so you should find a card with the lowest rate possible.
Most credit cards for fair credit charge an annual fee to maintain the account, either in one large sum or divided into monthly installments. Many charge a variety of additional fees as well, including monthly maintenance charges, account verification fees, credit limit increase fees and more.
All of these fees are charged directly to your balance, where they will accrue interest just like a purchase. Even if you never use the card for purchases, just owning it and incurring fees will cost you money.
Plus, credit limits on unsecured cards for fair credit are typically much lower than traditional cards. All of those fees can result in a high utilization ratio, which can have a negative effect on your credit score.
To save money and prevent further damage to your credit score, you should look for a card with the lowest annual fee and least amount of additional charges.
This article originally published by U.S. News Staff. USNews.com.
In a Nutshell
Unsecured credit cards can be a valuable tool; for both building and maintaining strong credit and for building rewards program value (but only if you’re paying each month’s statement in full). If unsecured credit cards are not managed well, they can have destroy great and good credit scores.
So understand very well, the terms of the unsecured credit card(s) you have and make sure you’re not carrying monthly statement balances into forward months. Use them strictly for accumulating rewards program values and keeping your creditworthiness strong.