Credit cards are the topmost form of paying for almost everything in the USA. Debit cards come second, followed by electronic payment systems, while cash ranks a miserable fourth in the preferred mode of payment in America.
No doubt: there’re over 1.1 billion active credit cards in the USA, with most Americans above 18 holding between two and five credit cards.
This could come as a surprise to most of you. It shouldn’t.
Having a credit card is good or bad. It depends on your personal views and nothing else. Millions of Americans use credit cards. Then, there’re also millions of Americans that don’t use a credit card simply because they don’t want one.
Again, we have millions of Americans that wish to own a credit card but can’t get one due to poor credit scores or income that’s quite low. And these can become a hurdle if you wish to have an unsecured credit card. Of course, you can still apply for a secured credit card from your bank, credit union or any financial institution that offers the service.
Types of Credit Cards
In the US, we have two kinds of credit cards that most people can apply. These depend on a lot of factors as well as specific terms and conditions of banks and credit card issuers. As I said, credit cards are the topmost form of payment in the USA. Let’s understand the two different types.
Secured Credit Card
These kinds of credit cards don’t require you to have a good credit score or proof of income. Instead, you will provide collateral in the form of a term deposit or fixed deposit or cumulative deposit to the bank or credit card issuer. In such cases, they will allow you between 75 per cent and 90 per cent of your security deposit.
They will hold your money in lien and release it only when you clear all dues on your credit card. A secured credit card is said to be the best for beginners who wish to build a good credit score, for persons that wish to ensure that all their credit card dues would be paid in any situation and for those who seldom use credit cards.
A secured credit card comes with most features of an unsecured credit card. However, an unsecured credit card can give you some peace of mind since you’ve already given a security deposit and don’t need to seriously fear credit card delinquency or default.
Unsecured Credit Card
About 83 per cent of all Americans use an unsecured credit card, which is the most common. However, these figures could be wrong. On average, an American individual uses anything between two and four credit cards. According to available data from Statista, there were some one billion active credit cards issued and in use in the USA by the end of Q4 of the year 2022.
An unsecured credit card means the bank or the issuer finds you have a good credit score and ability to repay the dues. In some cases, they also consider your work history and household income as well as other liabilities such as home mortgage and vehicle finance. Actually, unsecured credit cards are difficult to apply due to the large number of documents that an issuer needs from you.
There’s another type of unsecured credit card in the USA. That’s the Business Credit Card or the Corporate Credit Card. These are available to businesses- regardless of whether it’s a large corporation or your own personal side hustle. To qualify for a business or corporate credit card, the enterprise should have a superb credit score from FICO or Fair Isaac Corporation.
Also Read: How Many Credit Cards Should You Have?
Understanding CARD Act 2009
Actually, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 doesn’t specify any minimum salary or income for holding a credit card. However, the CARD Act 2009 does have certain clauses to protect consumers against predatory practices by credit card issuers.
These include banks, or credit card issuers should ensure the person is able to pay dues on time and has enough income or salary for this purpose.
However, some banks and credit card issuers allegedly use loopholes of the CARD Act 2009 to attract customers or up own profits. They offer unsecured credit cards to thousands of people each month. Because an unsecured credit card is a way for these banks and issuers to earn hefty profits.
Bank Profits from Credit Cards
Yes, banks earn a lot of money by issuing you an unsecured credit card. You would surely be shocked by some of these figures I have found online about the amount of money a bank or credit card issuer makes per person and annually.
In stark contrast, banks don’t make so much money when you apply for a secured credit card by giving a security deposit in the form of a fixed deposit or another account for lien purposes.
The fact that banks and other issuers push hard to popularize and get takers for their unsecured credit cards can be seen by the sheer number of value additions, freebies and loyalty club memberships they give away. You could get all sorts of stuff, such as free Amazon shopping coupons to complimentary hotel stays, restaurant meals or other stuff.
Some offer free access to airport lounges, too– a privilege usually reserved for passengers flying in premium Business or First class, where airfares are extremely high. Operators of these lounges spend a fortune on free food, drinks, Wi-Fi and other amenities they provide to users of certain kinds of credit cards. Your bank or credit card issuer pays for it by charging you indirectly.
A CNBC News report in February 2023, quoting TransUnion, states that total credit card debt in the USA stood at a whopping $ 930.6billion by the end of Q4 of 2022. This is an 18.5 per cent rise over previous years. The higher debt corresponds to an increase in spending by Americans afflicted by inflation in the USA.
Remember that in most cases, banks and other issuers will increase your spending limit on credit cards occasionally and sometimes upon request. They don’t do it because they love you. Instead, they love your spending and the money they can make from your credit card usage.
How Unsecured Credit Cards Work?
Since you’re now aware of various facts and figures about unsecured credit cards, let’s understand how they work. Basically, unsecured credit cards in the USA are issued by banks, credit unions and financial corporations. Foreign banks operating in the USA also issue credit cards to their customers.
In the US, all credit cards- secured and unsecured- are regulated by the Consumer Financial Protection Bureau (CFPB), a Federal government organization.
Applying for an Unsecured Credit Card
Applying for an unsecured credit card is the first step to knowing how they work. You can apply online or offline at a bank, credit union or financial institution of your choice. In fact, most people check online for best unsecured credit cards and promos available at the time of application.
This could help you save some money at times. Sometimes, banks and other issues waive off application fees or annual membership fees or even offer free lifetime membership when you apply during a specific promotion. These promos are usually announced on websites and newspapers. However, read the terms and conditions carefully before you apply since there could be lots of fine print that are not seen on these promos.
Documents and Information
Usually, the bank, credit union or financial institution where you apply for a credit card will seek a lot of documentation. These can be either soft copies or even printouts. The number of documents would generally depend on the bank or credit union, or other credit card issuers.
Some of the common documents and information credit card issuers want to include your educational qualifications, employment history, and proof of current and previous incomes such as salary, in the form of bank statements, Social Security Number and Internal Revenue Service (IRS) tax receipts. These will also vary and depends on each bank, credit union or other credit card issuer.
Your credit score actually could decide whether or not you get an unsecured credit card. You could have superb employment history, impeccable record and very high income. But if your credit score is poor, there’s every chance your credit card application will be rejected.
Usually, credit card issuers also consider various other factors such as your home mortgage, vehicle finance and other loans. They check your repayment patterns for these loans before making a final decision to approve or reject your credit card application.
Generally, credit card issuers also take your household income into consideration. That helps them to assess your monthly expenses and savings capabilities. For example, a household with two school or college students would be spending more money than a household of just a couple.
In a few instances, the credit card issuer could ask you to submit details of your household income. However, this is usually rare since only your individual income and credit score matter. Yet, be ready to provide these details if necessary.
Nobody speaks of this. Credit card issuers could also run a background check to find out if you have a criminal record and the nature of offences and convictions. No credit card issuer wants a frequent offender with a long history of crime. That’s because they’re risking the money they give as unsecured credit.
Having said that, a criminal record by itself doesn’t rob you of the chance to get an unsecured credit card.
It would depend on the nature of your offence and frequency as well as types of conviction. While US laws stipulate that there should be no discrimination against persons with criminal records, credit card issuers want to ensure their money is safe and could offer a credit card with a higher Annual Purchase Rate or some other conditions.
Using an Unsecured Credit Card
All of us know how to use a credit card, regardless of whether it’s a secured, unsecured or corporate/ business card. We can use it at Point of Sale (POS) machines where they swipe the card, key in the amount and print out the receipt after you’ve entered the secret numbers. Otherwise, we wave it before Radio Frequency Identification Device (RFID) machines at stores. And we use it online by giving the credit card number and other details.
Some of us link our credit cards to payment systems such as PayPal. Others use a digital version of credit cards through apps for added safety. Such digital credit cards on apps are linked to your main credit card. However, they don’t reveal your credit card number. Instead, they use a temporary and single-use number.
Finally, a lot of us store credit card numbers on trusted websites and apps for automatic renewal of subscriptions. However, in such cases, we have to cancel the subscription a few days before the new billing cycle begins.
Supplementary or Add-On Cards
Supplementary add-on cards are for our kids and other family members. To get such cards, you’ve to apply at the bank or credit card issuer. A supplementary card can cost you as much as the annual membership fee of your credit card. Therefore, read the terms and conditions carefully.
Supplementary or add-on credit cards don’t give you more credit. Instead, they operate on your credit limit. If the person holding a supplementary card spends, the money goes from your credit card. Actually, supplementary credit cards are ideal when you wish to teach responsible handling of money to your child or for use at their high school or college.
Billing Cycles of Credit Cards
All credit cards come with a billing cycle. This means you can pay after a certain number of days after buying something. It differs according to each bank or credit card issuer. Some allow 21 days credit while others go as high as 40 days credit. In simple words, it means that you can buy now and pay later before the end of the credit period.
Billing cycles can be confusing. For example, your billing cycle is from the first of the month to the 21st of the month. Anything that you buy on the 22nd might not reflect on the statement. However, the statement itself might come to you a few days later by mail or email. The things you bought on the 22nd of the month will be billed later or partially, depending on the bank or credit card issuer.
Usually, your credit card statement will show the deadline for you to make the full or partial payment. Now, here’s where banks make money. Mostly, banks earn very little or even nothing when you pay the full credit card bill. That’s because they have no reasons to charge you any extra money. They agreed to give you interest-free credit, and you took it and repaid it on time.
But, if you make only a part payment or the minimum payment necessary, the credit card issuer stands to gain. They add a hefty interest to the unpaid amount, which will show in your next credit card bill. If you continue part payments, the amount of interest keeps building and attracts more interest. Eventually, you might find that you’ve paid several times over for something you bought.
Various Kinds of Fees
As a credit card holder, you should be aware of the eight different kinds of fees and charges that banks will happily include on your statement. You can’t say that you were unaware of these charges since the credit card membership agreement will have it somewhere, albeit in the very fine print.
Thankfully, you can avoid these fees and charges if you’re clearing all dues on time and in full.
As I mentioned earlier, a look at some of the profits made by banks and credit card issuers will shock you. Credit card fees are one of the biggest sources of income for all banks, credit unions and other financial organizations that issue such cards.
APR vs Interest
One of the common terms that you will come across when using an unsecured credit card is APR. This means Annual Purchase Rate. Interest and APR are actually two different things, as Bank of America explains. In credit cards, though, you don’t pay interest. You pay APR.
By the end of March 2023, the average APR on credit cards in the USA stood at a dizzying 29 per cent. The minimum APR hovers around 19.20 per cent, according to various reliable sources. So, when you delay paying your credit card dues in full, you can expect to pay a hefty sum as APR on the unpaid balance.
As a matter of fact, I encourage you to read this wonderful information from Citizens Bank on calculating APR on your credit card. This info holds good for every credit card user in the US.
Are Unsecured Credit Cards Worth It?
And finally, to respond to your question: Are unsecured credit cards worth it, considering the eight different kinds of charges, annual membership fees and APR?
My sincere response is yes and an emphatic no.
Advantages of an Unsecured Credit Card
Actually, an unsecured credit card can prove very useful if you use it wisely and cut off reckless spending. Paying dues on time and especially settling the entire amount can work wonders to send your credit score higher. This makes you eligible for more credit, such as house mortgages or personal loans, if necessary.
At times when we don’t have cash on hand or in our bank account, a credit card can prove very useful. They’re especially useful in emergencies.
All credit cards are accepted for payment by millions of merchants around the world. This means you don’t need to carry foreign currency everywhere unless needed. Foreign transactions however cost some money, but so does buying and selling foreign money.
Unlike lost or stolen cash, a credit card that you lose or get robbed can be easily replaced by the issuer. You need to take certain steps to prevent their misuse, such as reporting their loss immediately and getting them frozen for fraudulent use. You can also get quick replacements for the cards. Tracing fraud on your cards and bringing scammers to justice is easy.
Disadvantages of Unsecured Credit Cards
Yet, credit cards aren’t worth it if you’re an impulsive spender who can’t control their urge to buy more and more stuff. An unsecured credit card can prove very dangerous to your personal finances if you allow APR to accumulate.
And worst, defaulting or not paying credit card dues can land you in trouble with the law. TransUnion fears that 2.60 per cent of new users of credit cards will default in 2023, which is higher than the 2.10 per cent in 2022. Credit card delinquency, as it’s known, would be spurred by inflation and unemployment, says TransUnion.
An unsecured credit card is also an invitation to spend for millions of Americans. They splurge the money on buying expensive stuff they can’t otherwise afford to pay if they had to give hard cash. Often, this becomes vanity buying.
Unsecured credit cards are also prone to several frauds, such as cloning and misuse, if the details are leaked due to any reason.
According to the Federal Bureau of Investigation and Department of Justice, some 65 per cent of Americans have suffered from at least one of the credit card frauds in 2021. This number can increase since there’s a rise in the number of identity theft cases in the USA. Credit cards and bank accounts are always the first targets of all identity thieves.
Secured vs Unsecured Credit Card
Personally, I believe that secured credit cards are better in several ways. They come with all the features of an unsecured credit card. Only they don’t come with unlimited spending limits. That’s because the amount of money you hold in deposits at your bank as collateral decides the spending limit. And this limit is often unnegotiable.
Secondly, if you’re unable to service or repay the debt on a secured credit card, at best, you will lose the security or collateral. You wouldn’t land in legal battles or have recovery agencies chasing you for the money. Furthermore, secured credit cards also don’t cause reckless spending since you know your money is already at the bank.
Credit cards are wonderful. They are the backbone of sorts in the American economy. They make our lives much easier and better. However, unsecured credit cards are like two-edged swords. If we use them without financial prudence, they could land us in serious trouble and lead to poverty.