Whether you're a student, recent graduate, or old-school cash consumer finally making the plastic plunge, establishing a credit history is as crucial to modern life as your cell phone.
Without credit, you'll run into expensive roadblocks at every milestone, according to the super popular budgeting and personal finance tool, Mint.
Good luck renting a car. Your car, life, and home insurance premiums will be higher than the norm. Utilities and cell phone providers might force you to put down a deposit. And finding a bank willing to sell you a mortgage for your new home will be next to impossible.
According to a 2015 study by the Consumer Financial Protection Bureau, one in 10 Americans — or about 45 million people — have no credit history to their name.
To make sure you don't end up in that pool, it's crucial to act now because establishing a credit history doesn't happen overnight. With FICO, the primary credit scoring system that the major credit bureaus report to, it can take up to six months to see your first credit report, longer still to build a good, competitive score.
The good news is that everyone starts off with no credit. Credit card companies WANT you to have credit so they can sell you services. And that means there are well-walked avenues to help you build credit from scratch — from personal loans to insurance plans.
When it comes to credit cards, there are pretty much two major types of cards you can use to rebuild your credit: secured and unsecured. Understanding the differences between the two is key to laying a solid credit foundation, so we hope you find this guide to the best-unsecured credit cards helpful.
1. The fundamentals of the unsecured credit card — understanding risk and collateral
To understand the difference between secured and unsecured credit cards, you have to first understand the basic concept of credit. Credit is pretty much a contractual loan('take this $1,000 now') that lenders offer us consumers in exchange for future repayment, typically with interest ('and pay me back $1,150 in a month').
This means every time a credit card company approves a credit card (or a bank approve a personal loan), it's taking a risk on a consumer — you! — who could potentially max out the card and never pay it back. To lower their own risk, credit card companies look at an applicant's financial trustworthiness, primarily through a credit history check.
But what if, for whatever reason, you don't have any credit? Here's where the concept of secured and unsecured comes along.
How a secured card is different from an unsecured card
A secured card is backed by some type of collateral, typically a cash deposit. Think of this deposit like a security deposit a landlord requires before you can rent. It functions to reduce the risk to the credit card issuer, so if you end up not paying your bill it has a "safety deposit" it can draw from. For this reason, secured cards are geared toward people with bad or no credit.
An unsecured credit card requires NO collateral or security deposit. It's the most common and likely familiar type of credit card out there. For this reason, credit card issuers typically gear unsecured cards toward people with good, well-established credit.
So you must be thinking: If you don't have any credit, there's no way to get an unsecured credit card.
Not so fast! Just because you don't have any credit does not mean an unsecured card is out of reach.
2. Landing an unsecured card for bad or no credit is possible but comes with risks
Let's say you have no credit, $200 in savings, and don't own a car or a home. Putting together enough collateral toward a worthwhile secured credit card might be tricky. Typically, the security deposit is equal to the credit limit you'll be granted, so even if you drained your savings, your credit limit would still be a meager $200.
More importantly, it's never smart to drain your savings since you never know when an emergency might strike. A recent Federal Reserve survey found that about 46% of Americans said they did not have an established emergency fund to cover a $400 crisis.
Credit card companies are aware of this and have created unsecured cards for those very people both without any credit nor much available collateral.
But what about the higher risk? After all, would you be comfortable giving a stranger without any financial history a $500 loan? Well, there's the catch. Unsecured cards for those without credit typically carry higher fees and interest rates than secured cards (more on this later).
3. Secured cards are safer to rebuild your credit, but unsecured cards can still do the trick
Any credit card is theoretically good for building credit. Your card issuer typically reports your credit activity to the three major credit bureaus monthly, Equifax, TransUnion, and Experian. These credit bureaus then calculate what becomes your FICO credit score. To maximize your score, it's crucial to understand the breakdown of how your report is calculated:
Payment history (35%). Have you paid all your past bills on time?
Amounts owed (30%). How much money do you? The lower your credit utilization ratio (used/available), the better.
Length of credit history (15%). When did you start building credit? The longer the better, typically.
Credit mix in use (10%). What cards, accounts, and do you have? The more diverse the better.
New credit (10%). How many cards did you apply for recently? Even a couple is often a red flag for lenders.
So, as you can see, the type of card does not directly affect your credit. In other words, whether you're using a secured or unsecured credit card doesn't matter. What matters is whether you're paying your bills on time and keeping your credit utilization low — typically around 20%.
That being said, because unsecured, "no-credit" credit cards typically come with higher fees and interest rates, it's crucial that you understand these rates so you can anticipate and afford these extra costs. Otherwise, if you're hit with a higher bill than you expected—and you can't pay it back on time—your credit score will pay the price.
4. The high interest, high fee risks of unsecured credit cards for someone with limited or no credit
When it comes to any credit card you're considering applying for, there are three big criteria to pay attention to (and avoid), according to Andrew Latham of supermoney.com.
- Too high annual percentage rate (APR). This annualized, fixed interest rate is applied to any balance you carry forward to the following payment period, and ranges from 15-25%. For bad credit unsecured credit cards, the risk is not paying back your entire bill and getting hit with a huge interest payment the following month.
- Exorbitant annual fees. This one-time fee is typical to the industry, ranging from $25-500. Sometimes this fee is waved the first year. Unless you're receiving a lot of perks with your card, this fee shouldn't be over $100 or so. The risk here with the annual fee is not taking advantage of the perks offered and paying more in fees to the card company at the end of the day.
- Go over your line of credit. This is how much money you'll be allowed to spend per month. If approved, no credit or bad credit applicants are typically granted a low credit limit. The risk here is going over your credit limit or even using too much of it and hurting your credit score without intending to.
For unsecured, no-credit credit cards, off the bat you should expect a high APR, minimal credit line, few perks, and likely an annual fee. That doesn't sound great, but it's the tradeoff for obtaining credit without forking over some collateral.
One big perk you likely won't find with these cards is a cash advance. That means if you have an emergency and need cash quick, even if you're willing to take the interest hit down the line, you'll be out of luck. That being said, most cards carry a high cash-back APR that could put your credit score at risk. It's always best to withdraw directly from your checking or savings account if possible; otherwise, make sure the card you choose has a low cash-back APR.
5. Three unsecured no-credit credit cards to consider
It's true that there are undoubtedly more secured credit card options out there. Still, a number of banks offer unique unsecured Visa cards for people with no credit. These cards aren't rated very highly by syndicated credit card review sites. And while we would recommend going with a secured card if you can—the lower interest rates and fees being the two big selling points—here are brief overviews of three unsecured cards that have been highlighted around the internet.
Why we chose these cards. The credit card issuers advertise them specifically for people rebuilding their credit and because many other review sites, including Creditloan, have highlighted them as worth your attention. Also, two of these cards are issued byCredit One Bank.
The cards are relatively straightforward in how they work. While we tend to always skip passed the fine print, for unsecured, "no credit" credit cards, the pesky, mind-numbing legalese is crucial. While these cards also tend to carry hidden fees or unexpected limitations where other credit cards wouldn't, they are they relatively the easiest to understand.
Yes, they'll be some limitations with these unsecured cards compared to secured ones, but hey, you're getting a line of credit and you're working to get your credit score up. Whichever way you go, unsecured or secured, the key is to pay your bills on time.
Platinum Visa Unsecured by Credit One Bank
APR. 16.99-24.99%, variable
Annual fee. $0-99, depending on your credit report
Perks/pitfalls. 1% cash back on eligible purchases, $0 Fraud Liability, and credit line increase opportunities
According to Josh Patoka at The Finance Genie, one benefit of the Platinum card is that you can see if you pre-qualify before applying. "This saves a hard inquiry on your credit score in case you do not qualify for the card."
What the experts say. Eric Frank of Badcredit.org emphasizes that with these unsecured cards and the high APR they come with, it's crucial to keep your credit utilization ratio low. "Your strategy should be to pay off most, but not all, of your balance each month, avoid tapping more than 20% of your credit limit, and never miss a payment due date."
How to apply. You can see if you pre-qualify for the Platinum Visa over at the Credit One Bank website.
Credit One Bank Unsecured Visa
APR. 16.99-24.99%, variable
Annual fee. $0-99, depending on your credit report
Perks/pitfalls. 1% cash back on eligible purchases, $0 Fraud Liability, and email and text alerts to remind you when your bill is due
What the experts say. Elisabeth Chan of creditnet.com rates this card one of the best options on the market. "Keep your balances low, pay your bills in full and on time, and you should see improvement in your credit while using this card."
How to apply. You can see if you pre-qualify for the Unsecured Visa over at the Credit One Bank website.
Total VISA Unsecured Credit Card
APR. 29.99%, variable
Annual fee.$75 for the first year, $48 each subsequent year
Perks/pitfalls. No-fee credit line increase opportunities and a fast application process. One time $89 processing fee.
What the experts say. Credit card expert Beverly Harzog recommends to avoid this card if possible, but if it's the only unsecured card you qualify for, suggests you keep a low balance. "With a $300 limit, keep your balance under $90 (the closer to $30, though, the better) and pay your bill in full and on time every month. Your goal is to use this card for a year to rebuild your credit."
How to apply. You can see if you qualify for the Total Visa over at the Visa website.
6. Online is the best place to apply for an unsecured credit card without credit
Yes! Reason being, while your credit is the primary data point providers use to assess risk, it's not the only piece of data they are interested in. While it varies from provider to provider, the typical information you'll need to provide includes:
- Driver's license number
- Social Security number
- Date of birth
- Annual household income
7. The processing timeline - from application to approval
The waiting time between application receipt and approval varies from provider to provider. Generally speaking though, the better your credit rating, the faster the response time. So, without credit, be prepared to wait up to a few weeks to hear back.
That being said, many cards offer a pre-qualification check, which takes less than a minute and won't affect your (still non-existent) credit score. This is a great, zero-risk way to not waste time waiting for a denial because you'll find out if you qualify instantly.
The secured to unsecured graduation path
The more traveled route that consumers take is getting a secured card and after some months to a year of on-time payments, graduating to a better-unsecured card. Still, whether the card you're using is secured or unsecured, after six months to a year of good credit behavior, your credit card issuer will likely approve you for a better-unsecured card with lower fees and higher credit limit.
If you want to learn more about rebuilding your credit, check out our Guide to Improving Your Credit Score in 24hrs.
Have you had a great or miserable experience with a secured or unsecured card? Let us know in the comments below.