It is common knowledge that your credit card has a huge impact on your credit score. For those who are wanting to improve their credit score – or who want to make sure that an already high credit score remains high – it is important to take a look at your credit card habits and make sure that you are using them wisely. In this article, we’ll take a look at some different ways that you can use your credit cards so that they have a positive impact on your credit score.
Designate a Credit Card for NEEDS
The first thing to remember is that you should only apply for a credit card when you actually need it AND you plan on using it. Many department and other stores offer you incentives (such as 10% off) to sign up for their card. After that initial savings, many consumers never use the card again or, even worse, fall victim to their higher than average interest rates. While there is not one “acceptable” number for how many cards you should possess, having a long list of cards that are never used can bring your overall credit score down.
Using Credit Ratios to Your Advantage
If you’re now thinking that you should go and close all of your old credit accounts that you never use, think again. Once a card is open, its credit limit is added to the amount of credit that is shown as currently available to you. One thing that affects your score is the ratio between credit used and available credit. The better the ratio (i.e. the lower the percentage of credit that you are using in comparison to the amount available), the higher your score. This means that closing old accounts (and thereby taking away that credit limit), can have a negative impact on your score. So once cards are open, keep them open. Just keep them at zero balance.
For your cards that are open and that you are using, keep the balance low and make sure that you pay them on time. If possible, try and keep your credit-to-debt ration under 30%. If you cannot pay off the full balance every month, make sure that you are establishing a pattern of regular payments that pay off the interest and decrease your principal.
When You Need a New Card…
If you are in need of a new card, make sure that you only fill out credit applications for cards where you meet the qualifications. Each credit application will be followed by a credit inquiry, which will allow the credit card company to determine whether or not they will accept your application. Too many inquiries can have a negative impact on your score, so make sure that you are not putting in applications that are guaranteed to be rejected, which forces you to fill out an additional application and receive an additional inquiry.
By following these simple tips you can make sure that your credit card use is determined by healthy and helpful behaviors – behaviors that will help improve your credit score and your overall financial health.