In a fractional reserve banking system, credits cards and other unsecured lines of credit are not very different from how a bank handles the financial end of mortgages and loans: because it only needs to keep a small reserve from depositors in their vaults (digitally or physically), it can loan out the rest in the form of loans and lines of credit. If the reserve was set to 10%, the bank could use 90% of a deposit for credit cards or mortgages and other loans.

In a full reserve bank, credit card lines of credit (unsecured) would still be available, but the process at which the bank covers purchases made on the credit cards is directly tied to depositors who want a higher return on their investment. In the case of a mortgage or loan secured with an assets (say, a house, car or business), the interest rate paid to investors is lower as there is an asset backing the deposit. In the event of a delinquency from the borrower, the bank would repossess the asset, sell it, and pay back the depositor based on what the asset sold for. Since credit cards are unsecured, a depositor would want a higher interest rate to overcome the risk of delinquencies.

Read this entire article at the full reserve banking site.

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