Can you improve your credit score by using your credit cards? Certainly, you can — just as you can drop your credit score by using your credit cards. Consider these 5 tips that can help you manage your credit cards properly and pump up a flagging credit score.
1. Pay Your Bills on Time – If you only choose to follow one of these tips, make it this one. It is extremely important to make all of your payments on time, because your payment history constitutes 35% of your credit score. That's the largest single factor used by the credit bureaus to assess the risk that you present. Put reminders on your phone or computer, but make those deadlines.
According to Bankrate.com Chief Financial Analyst Greg McBride, "You can build your credit score very effectively by opening up credit cards and then paying the balance in full at the end of the month. You do not need to carry a balance – particularly at a high interest rate – in order to build your credit rating."
2. Maintain a Low Balance – The next most important factor in your credit score (30% of the total) is the amount of money that you owe. By controlling your credit spending to an amount that you can pay off each month, you can avoid carrying a balance and thus maximize the positive effect on your credit score. When monthly payoffs are not an option, pay as much as you can to keep your balance as low as possible. And don't forget to pay on time!
3. Keep Credit Utilization Low – Credit utilization, also known as your debt-to-credit ratio, is the amount of credit you use (how much you owe) compared to the total amount of credit available to you (your collective credit limit). A rough guideline is to use 30% or less of your available credit at any point in time, but generally, you should keep your credit utilization as low as possible. Paying in full each month can lessen the effect of credit utilization since it proves that you can handle a higher ratio responsibly.
The credit utilization principle applies not only to credit totals, but also to individual credit cards. If your normal purchases approach the limits of any one card, ask to have your credit limit raised — but do not use that as license to spend more. "The higher that [credit utilization] rate, the worse it is for your credit scores," confirms Experian Director of Public Education Rod Griffin. "What we found is people with the very best credit scores have utilization rates of less than 10%."
4. Stick With Accounts – There is nothing wrong with switching credit cards to get a better deal on certain occasions, but doing so frequently can undercut your credit score and eventually hamper your ability to get good deals. Your length of credit history makes up 15% of your credit score, and an account that has a long-standing history of on-time payments and responsible credit use has a positive effect in multiple areas.
It might seem that closing older, less used accounts would be a wise move — but this can backfire by lowering the average age of your accounts and raising your credit utilization by reducing your total available credit. Before opening, closing, or replacing any new accounts, consider the overall effect on your score.
5. Use a Budget – The convenience of credit cards can lead to impulse purchases and increasing balances. By incorporating credit purchases into your budget, you can maintain spending discipline and avoid unnecessary purchases that can pile up debt and raise your credit utilization.
If you are not seeing the expected improvement in your credit score, review your credit report to see if there are any errors in reporting that are dragging your score down. If you believe there is a mistake on your credit report, you can resolve it with a single click using Credit Manager by MoneyTips, where you can check your credit score and read your credit report for free within minutes. It is wise to check your credit report periodically regardless of your credit score.
It's a simple concept: Use your credit properly, and be rewarded with a higher credit score and access to lower interest rates and better credit card offers. Use credit poorly, and suffer the consequences for years.
If you want more credit, check out MoneyTips' list of credit card offers.