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)

Credit union credit cards: Why they're better than banks'

Credit Union credit cards are better than bank credit cards in the sense they have lower average interest rates and may be issued more responsibly. Since credit unions are non-profit organizations, the modus operandi is different than for a for profit bank. Moreover, a credit union is a collaborative and cooperative of members who's deposits, fees and interest payments to the credit union assist the credit union in serving the membership as a whole. This is reflected in credit union credit cards because they are generally more cost effective than bank credit cards. Bank credit cards do have some advantages in terms of accessibility, credit limits and product line however, credit union credit cards are on average more cost effective than bank credit cards as this article demonstrates.

Bank credit card(s)

According to indexcreditcards.com, the average credit card rate for the entire credit card market is 14.03%. This market includes credit unions which have a 2.74% lower average interest rate on credit cards than banks (hffo.cuna.org) Banks are also more likely to charge higher fees for penalties such as late payments and over limit fees. According to Judy Dahl, a writer for hffu.cuna.org, banks charge $15-$20 more for late payment fees than Credit Unions in addition to an average $13 higher over limit fee on checking accounts.

• Higher average interest rates
• More late payment fees
• Elevated over limit fees
• Credit card checks may charge transfer fee
• Bank profits from credit card interest 
• Fees do not necessarily lead to lower interest products
• Low credit scores more likely to lead to higher credit card APR
• Additional fees and/or surcharges more likely

Credit Union Credit Card(s)

Credit Union's are interested in serving their members financial interests as a priority rather than meeting the banks profit objectives as first order of business. This leads to overall benefits on credit cards across the board. Junk fees are less likely to be charged, additional or supplementary services related to payment or maintenance of credit cards is more likely to be free or lower cost and penalty fees are more lenient on average.

• Manage credit card payments through credit union
• Lower average interest rates
• More cost effective late payment fees and over limit fees
• Credit Union income serve member interests
• More likely to issue credit responsibly
• Fewer and/or lower supplementary service fees
• Free online credit card bill pay at some credit unions

Summary:

The benefits of credit union credit cards are clear as this article has demonstrated. While some banks may offer better credit card deals than some credit unions, on average, banks are less likely to provide more financial cost advantages to credit card holders based on average statistics. Obtaining a Credit Union credit card may be more difficult than a bank credit card, and credit limits may be lower on average, however other than this, the benefits tend to stack up in favor of credit union credit cards due to the lower costs. There is always some room for disagreement as to which is better as banks may have a wider range of products and services for a higher cost. Moreover, if cost is not an issue for a client, the lower costs provided by credit unions may not be considered an advantage. For budget minded folks however, credit union credit cards present a clear cost advantage.

Sources:

1. http://www.consumersavvytips.org/the_credit_union_vs_the_bank.html
2. http://www.indexcreditcards.com/creditcardmonitor/
3. http://hffo.cuna.org/13856/article/1894/html/