An unsecured credit card is one whose available balance is not secured by actual money, A secured credit card works largely the same way as a debit card, in that the entire balance available is backed by cash you already have, so when most people think of having a “credit card” they think of unsecured ones.
Does having one or more unsecured credit cards help or hurt your credit rating?
After the payment history factor (looking at whether you make your payments in full and on time), the second most important factor used in calculating your credit score is credit utilization. This is basically the ratio of your current credit balances (the amount you currently owe) to your credit limits (the amount of credit you have available). Both unsecured credit card debt and secured credit card debt are factored in this calculation.
Credit utilization accounts for some thirty percent of your credit score in most FICO based rating systems. The less of your available credit that is being actively used, the better this factor is and the higher your credit score is. This factor relates primarily to revolving credit accounts, so credit cards, both major ones and store-specific charge cards, play a big role.
For example, if your Visa card has a limit of $10,000 and you have an outstanding balance of $1,000, your credit utilization ratio is 1:10. When calculating your FICO score, a similar calculation will be made for each of your revolving credit accounts and these totals will be combined to determine your credit utilization. So, even if three of your four credit cards carry no balance, but the fourth one is at the limit (“maxed out”), your combined ratio will still be significantly lowered regardless of how good of shape the other cards are in.
It should also be noted that paying off and then closing a credit card account can hurt this part of your credit score. Paying off the credit card balances each month, and thus carrying no debt forward provides the best possible scores. (You just need to pay before your statement cuts – not on the due date!)
However, if you pay off and then close the account, the second part of the ratio – the amount of credit currently available – is reduced, which in turn lowers your average. People working on credit score repair should consider keeping their revolving credit accounts open, even if they do not actively use them and keep their balances paid off. Doing this significantly increases the amount of revolving credit available and therefore increases the total score for this factor.
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