The Nilson Report, a research firm, found that 78 percent of households in the United States had at least one credit card by the end of 2008. Most people carry their cards without questioning the type of loan provided by the little rectangular pieces of plastic. They know their mortgage is secured by their house and their auto loan is secured by the vehicle, but they may not think about the fact that nothing tangible secures most credit cards.
Definition
An unsecured credit card is a card linked to an account that has nothing tangible to guarantee payment other than your written promise, The Wall Street Journal's FiLife website explains. This is in contrast to vehicle loans, mortgages and other accounts guaranteed by a specific item.
Features
An unsecured credit card features a credit limit based on the consumer's credit score and the information on his credit reports. Banks use this information to determine the consumer's likelihood of repaying the loan as agreed. Those who are most likely to do so get the highest credit limits and best interest rates. People with low credit scores might have to pay high interest rates and fees, or they may be totally unable to get an unsecured credit card.
Function
An unsecured credit card allows you to spend money that counts against your credit limit. FiLife explains you are agreeing to pay for each purchase when you let a merchant swipe your card and sign a transaction slip or use the card online. Your transaction acts as a contract for the repayment.
Alternative
There is an alternative to unsecured credit cards for people whose credit scores are too low to qualify for unsecured accounts. They are required to make a bank deposit of at least $300 to $500, Pat Curry of bankrate.com explains. This money secures the credit card account, and they get a credit line equal to their deposit amount. Their credit limit might be raised if they build up a good history. The bank may even convert their credit card to an unsecured account.
Warning
You are not safe from negative consequences for nonpayment of a credit card debt just because it is an unsecured loan. Creditors can take you to court and get a judgment against you for the amount you owe on the credit card. The judgment will be placed on your credit reports, significantly lowering your credit score. They may be able to garnish your wages or take further action in some states.
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