How to Manage Unsecured Credit Cards

Image attribution: U.S. Department of Justice; US-PDGov

To manage an unsecured credit card it helps to first know the five factors that go into your credit score. The Fair Isaac Corporation, creator of the FICO score claims credit history, types of credit, amount of credit, new credit, and credit history all provide a basis for credit calculations. Unsecured credit cards don't have to mean sky high debt or a bad credit rating. Managing unsecured credit cards well uses the same good credit habits that one would use to raise a credit score.

Managing unsecured credit cards well also avoids the more negative consequences of credit card use; this implies there are risks associated with using these cards. Specifically, these risks include interest rate risk, and debt risk. Understanding what credit cards are for is helpful in managing them well; for example if unsecured credit cards are thought of as lifestyle loans rather than an alternative form of payment, chances the cards will be used in excess may increase by virtue of credit intent.

• Debt to credit ratio

As with secured credit cards and when building credit score, using less than 40 percent of the total available balance is usually a good idea. For example, if you have three unsecured credits with credit limits of $1,500 $3,500 and $5000, the total available credit is $10,000. Using $4000 or less of this limit will ensure a debt to credit ratio of .4 or 40 percent. According to the Fair Isaac Corporation, the amount you owe on credit cards affects up to 30 percent of your FICO score.

• Use of unsecured credit

Regular use of unsecured credit cards also builds credit if proper payments are also made on that use. If using credit is not a preference that you feel comfortable with, only use credit enough to build credit as avoiding having to use or rely on credit is often a good idea anyway. Not using credit cards at all shows creditors you are not a low risk or potentially profitable client and may hamper obtaining credit in the future.

• Purchase constructively

What is spent using unsecured credit cards can affect how well you manage them. For example, if you use a credit card to buy a tool or piece of equipment used in a job or business, then that purchase has a potential return on investment (ROI). This ROI may exceed the cost of credit used, if any.

• Make payments

Making payments on your unsecured credit cards is ideally done in full and consistently. On time payments avoid late fees and being reported to credit bureaus. Payment history affects up to 35 percent of your FICO credit score. Making regular payments also demonstrates fiscal responsibility, the capacity to stay within a budget and an understanding that the credit is a temporary loan rather than debt with optional repayment.

• Ask for credit

At some point after using unsecured credit cards for a while you may want to request higher balances to increase your debt to credit ratio. This can increase your credit score and improve interest rates on loans. Asking for more credit should generally not be done until responsible credit card use has been established as measured by the debt to credit ratio and after enough time has passed where this ratio has been maintained i.e. at least a few months.

Source: http://bit.ly/ggXQt (MyFico)