Using Credit Cards to Improve Credit

Your FICO score is one of the main sources of information that banks look at to determine your creditworthiness, yet most consumers have no idea how their credit card use impacts this score. In fact, using your credit cards can actually improve your credit rating.

Here are some tips to help you become a more savvy credit card user:

When you are trying to improve your credit score, your first impulse might be to start canceling accounts. However, reducing the amount of credit available to you may, in fact, hurt your credit score rather than help it. One third of your FICO score is based on what balance you are carrying on your cards in relation to the overall amount of credit available to you. The bank is more interested in that ratio than the actual amount of credit, or number of cards. So ideally, you would want to keep your credit card balances low but keep the card open.

Also, having a lot of credit cards won’t necessarily hurt you if you are not carrying high balances on the cards. For example, if you have had 15 cards over the last 20 years, but you only use three of them, that won’t necessarily bring down your FICO score. Your credit rating is based on the proportion of your debt, not the number of cards. Having a lengthy credit history counts in your favor. As long as your card is on the credit report, it counts – and closing accounts only brings them off of your credit history that much sooner.

If you want to improve your credit rating, the most important things to remember with your credit cards are:

Pay your bill on time. A late payment counts against your score immediately, and it may take up to six months for that to come off your record. Establishing a history of on-time monthly payments is the best way to bring your score up. (Paying over the minimum is always a good idea, too.)

Keep your balance below 50% of the credit limit. If you go over 50%, you will get points deducted from your credit score. So pay down those cards, and make sure your maxed out cards are paid first.

Keep an eye on your balance versus credit available. Since much of your score is based on the amount of credit available to you, you might not want to cut up those cards just yet. In fact, it might be worth calling your card issuer and seeing if you can raise the amount of credit available to you on an existing card. This could be better for you than applying for a new card, which hurts your credit score.