Unsecured credit is any credit extended without anything of value to secure it. When applying for unsecured credit, your objective is to convince the creditor there’s little risk involved in giving you the credit.
Types of Unsecured Credit
Short-term loans from friends and family are usually unsecured, but most unsecured credit is supplied commercially and takes the form of unsecured personal loans, often called signature loans, and credit cards.
Signature loans, also known as personal unsecured loans, are issued by banks, credit unions and finance companies. In addition to your signature, the lender generally requires that you have a job and earn a certain minimum annual income. The lender checks your credit report too. The application process is fairly simple, often requiring only a single form which can be completed in person or online. Many lenders may even give a decision within a day or less. Signature loans are generally paid in a lump sum and repaid in a number of fixed payments over a set period of time.
Payday loans are signature loans that charge extremely high interest rates. Banks and credit unions always charge much better rates than payday lenders. Some states prohibit these loans.
A credit card allows you to make purchases for goods or services on credit. You can then pay back what you spent in smaller chunks, generally each month. Some credit cards from major companies like Visa, American Express and Discover, allow people to make purchases generally anywhere. Cards issued by retail establishments not affiliated with any major credit card company are generally good for purchases only in a specific store, such as a department store or gas station chain. While some bank credit cards are secured by depositing funds to an account at the bank, most are unsecured.
Qualifying for Credit
You must demonstrate creditworthiness to get unsecured credit. This is most easily done by paying your bills on time and using credit wisely. When you pay bills late, especially for credit cards and loans, creditors may report your delinquency to one or more credit reporting agencies, which track your use of credit and keep a credit score that reflects your use of credit.
In addition to late bill payments, bankruptcies, repossessions and outstanding legal judgments will also negatively influence credit scores. Moreover, every time you apply for credit, your credit score is reduced by a small amount, but only for a short period of time.
Applying for Credit
You can apply for loans through most lenders, like banks, and all credit cards online; you can also apply in-person for a loan. Applications require your name and address, Social Security number, telephone number, banking, employment and income information. While the basic decision to offer credit is based creditworthiness, the better your credit, the better terms and conditions you can expect, including interest rates. You may also qualify for a promotional interest rate on credit cards, a heavily discounted or even zero percent interest rate for the first 12 to 18 months, following which the regular rate is applied.
If you have poor credit and can't get approved for a loan, you may be able to apply with a co-signer, a person with good credit who also signs the application and guarantees the loan. Making the payments on time and satisfactorily paying off the loan generally helps improve the your credit score. On the other hand, if the borrower fails to make the loan payments on time, the bank may send a negative report to the credit bureau and demand payment from the co-signer, who’s legally obligated to make good on the loan.
Dale Marshall began writing for Internet clients in 2009. He specializes in topics related to the areas in which he worked for more than three decades, including finance, insurance, labor relations and human resources. Marshall earned a Bachelor of Arts in communication from the University of Connecticut.