Unsecured Credit Cards

Those familiar with the concepts of secured and unsecured loans should have no problem distinguishing unsecured credit cards from secured credit cards.

Secured credit cards, like a secured loan, are credit card accounts where the credit card holder must offer collateral to the credit card company. Technically, collateral can be anything of value — a diamond ring, a car, a boat, or a home. For secured credit cards, however, banks prefer that you put up a cash deposit.

With unsecured credit cards, again like an unsecured loan, the credit card company (which is the lender) does not demand that you offer a specific asset to be pledged as collateral. Instead, the credit card company extends you a credit card line because of your general record of reliability and a proven, stable source of income.

The credit card company will have nothing to go on except your credit history, which they will pull from the credit ratings organisations. Your credit history should clearly demonstrate that you have the ability and the willingness to pay any of your debts on time. In order to obtain approval on your unsecured credit card application, you must meet certain minimum credit scores. That minimum score will depend on the credit card issuer.

Once your credit card has been approved, a credit limit will be established for you. The unsecured credit card functions like a perpetually revolving line of credit that is always renewed every time you pay the loan. The interest rates on unsecured credit cards are understandably higher than an unsecured personal bank loan. One reason for that is that the credit card company has less control over your credit card account than an ordinary bank loan, thus the risk to the lender is even greater.

If the debt you accumulate every month is habitually more than your monthly payment, the situation can quickly get very dangerous. Credit card issuers do allow you to carry balances into the next month, but they’ll be more than happy to levy significantly high interest rates; if you miss any payments there will be penalties. Holders of credit cards who pay only the minimum amount per month are not reducing the actual debt incurred.

Unsecured credit cards are the most common, and the most widely advertised, form of credit account. Because of the easy application process, the wide availability, and a general lack of restraint, the unsecured credit cards are the most widely used and abused. The unsecured credit card is the one you most readily associate with the generalised term ‘credit cards’. Often, these are the credit cards that can set you on a downward credit spiral if you are not careful about using them.

Unsecured credit cards are the source of unbridled financial freedom. When managed correctly, unsecured credit cards will give you extended purchasing power. However, the freedom that unsecured credit cards allow can also aid in your plunge into the morass of debt. If you follow a prudent financial strategy, there should be no problem. Despite their undeserved reputation, unsecured credit cards are not evil.

Back To Financial News September 2007