Portrait of African-American male holding cell phone in one hand and unsecured credit card in other, making transaction, using mobile banking app during lunch at cafe. Concept: what is an unsecured credit card?
Betsy Wise
By: betsy_wise
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What Is An Unsecured Credit Card?

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What Is an Unsecured Credit Card?

Along with photos and cash, your wallet usually contains several credit cards. According to a 2018 Nav report, business owners carry nearly twice as many credit cards as consumers. To demonstrate the importance of gaining access to credit, the survey also reported that small business owners, on average, spend 33 hours researching before applying for credit.

So, are those business credit cards unsecured credit cards that don’t require collateral or are they secured with a security deposit or assets? Let’s find out how an unsecured credit card works, its pros and cons, and your best alternative to credit cards for getting unsecured funding.

As the name implies, you don’t need to provide security in the form of a cash deposit or collateral to be approved for the unsecured credit card. For that reason, they’re more common among cardholders than secured credit cards. Unsecured credit cards are appealing to anyone who doesn’t have assets or cash to put down as security when starting a business or needing more working capital.

How Do Unsecured Credit Cards Work?

One caveat to consider is that without putting down a deposit, you could damage your credit if you can’t repay the card balance. That’s because the lender doesn’t have access to funds to cover any non-payments on your account.

Lenders still attempt to recover their losses. At first glance, it seems advantageous when a lender can’t seize property when you have an unsecured credit card and default on payments. However, they can report the unpaid balance to collectors and credit bureaus or take legal steps to recover their losses through the court system or wage garnishments.

This is how the process works once you apply for an unsecured credit card: first, the lender of your choice will review your credit history and weigh other factors to determine your credit risk. Just so you know, they will run a hard pull inquiry which can lower your credit score. Lenders run a credit check because they’re in business to make money and want to make sure you can repay the loan. You should ask the card issuer what their minimum credit score is before proceeding if you’re concerned about a drop in your score.

If you don’t know your credit score, you can sign up for a free service like MoneyLion to verify what it is and track your score when building credit. That way you’ll know what transactions the card issuer reports to credit agencies and spot any discrepancies.

Once the card issuer issues a card to you with a specific line of credit, you can use it as you would cash. If you repay the balance in full each month, you won’t feel the effect of paying a higher interest rate on unpaid balances. Some cardholders make multiple payments each month to keep their balances low or paid off.

It’s a good idea to review your spending habits before taking out an unsecured credit card. Do you typically purchase items you can’t afford? You need to make sure that the card is a good fit for your business.

Depending on the lender, you may pay an annual or monthly fee. Because it’s a greater risk for the lender, unsecured credit cards normally carry higher interest rates for those with lower credit scores. Some card issuers offer rewards like free access to your Experian score, customizable account alerts, cashback programs, and fraud liability protection at no cost.

Ready to apply? First check this list with the best unsecured credit cards 2019

Pros and Cons of an Unsecured Credit Card

By reviewing an unsecured credit card’s advantages and disadvantages, you can determine whether getting one is the right way to go.

PROS CONS
No collateral required Lender may charge annual, late, transfer, and other fees. Fees can negatively affect your credit utilization ratio which lowers credit score
Good credit isn’t necessary, you can use the card to build credit

Interest rates are normally higher to cover the risk to lender and credit limits are lower for fair credit applicants

Account history is normally reported to credit bureaus Poor money managers get into trouble when they can’t repay the loan or overspend
Cashback programs, one year zero interest, and other promotions, and automatic reviews to qualify for credit line increases Credit score may go down when lenders do a credit check
Temporary solution to cash flow problems Unsecured credit cards can be a costly way to build financial growth. Lenders make more money upfront to cover potential losses

Camino Financial: Your Best Alternative to an Unsecured Credit Card

When comparing credit cards and unsecured business loans, you must determine the cash cushion you need to run your business efficiently and cover unforeseen expenses. Moreover, it’s important to decide which type of funding is a better match for your business based on terms and conditions.

Camino Financial offers small business loans as a viable alternative to an unsecured credit card. In addition to not requiring collateral, here are a few reasons why one of our unsecured business loans is a good choice.

  • No credit history or minimum credit score required. This is one of the ways we enforce our motto, “No Business Left Behind”, since we understand that many entrepreneurs haven’t had the time yet to build a solid credit history.
  • Applying for a loan doesn’t affect your credit because we do a soft pull of your credit history
  • We report your payments to Experian, so you build your credit with each monthly payment
  • As your credit score increases, after 9 months you’ll be able to graduate to a second loan (larger amount and lower interest rate)
  • Fixed interest rates and fixed monthly payments, so you don’t get any unpleasant surprises like you can with credit cards
  • We only charge a closing fee, there are no other fees that you may pay with an unsecured credit card

We encourage you to experience the distinct benefits Camino Financial offers its borrowers. You can apply today and start accessing capital at no risk while you build a credit history. Additionally, you have 24/7 access to free online tools and resources geared toward business growth.

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