Using your credit cards to improve your credit score

November 1, 5:02 PMDetroit Credit ExaminerNoreen Panizzoli

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Credit cards can improve score.

An excellent credit score is the most important factor in every area of consumer finance. Responsibly managing a mortgage, credit cards, auto or personal loans and even your cell phone service will add depth to your credit history and increase their credit score. Your score influences whether that loan or line of credit you’re hoping for is approved. The higher your score is the better your chances of securing a mortgage, loan or credit card.

With all the negative talk and new legislation put in place to protect consumers, many people are shying away from using credit cards. But what many people don’t realize is that how credit cards are managed can have a positive effect on your score. Here are several reasons to consider hanging onto and responsibly using your credit cards.

Positive Effects of a Well-Managed Balance
One common misunderstanding of how your credit score is calculated is that a zero balance on your credit accounts will produce an excellent score. The reality is that lenders want to know that you can actually handle credit. Paying the balance in full each month shows excellent money management but it doesn’t convey the ability to handle debt in the midst of financial uncertainty. So, even if you have the ability to pay off the balance, allow one or two accounts to carry a small balance each month.

Inactive Credit Cards
One of the more frequent asked questions about credit cards is if cards that are no longer used should be closed. The simple answer is ‘no’. Having a credit card stashed away in a drawer does no harm to your credit score. But if you cancel that card, your total credit limit will be reduced, and you may see a drop in your credit score. The amount of available credit is compared to how much outstanding debt you have to determine your debt-to-credit ratio. You want to keep your allowable credit as high as possible, which means inactive cards should remain open.

Opening New Accounts
Opening a new credit card account, in and of itself, does not have a negative impact on your credit score – unless you apply too often. Every time you apply for a new credit card, a hard inquiry is generated on your credit report. Lenders become concerned when a large number of companies have a need to look at your report and may worry that you are in financial trouble and deny your loan application. Note: This not only applies to credit cards but all other credit or loan applications, as well.

Maintaining a Balancing Act
The idea that carrying a balance can have a positive effect on your credit score only applies if you only use a small percent of your available credit. If you’re anywhere near the limit, you will see a negative impact. You overall debt should be less than 50% of your limit; a lower percentage is even better. For example, if your credit limit is $1,000, you shouldn’t have a balance of more than $500.

Asking for Credit Increase
An increase in your credit limit will positively effect your score, with a higher total limit. However, if you request the increase, a hard inquiry will post to your credit history. However, the increase in your credit limit will likely offset the dip that the inquiry may have on your credit score.

Keep Them Active
Financial experts suggest that consumers use every active account at least once every six months. It only takes a small purchase to keep an account open and maintain the credit limit.

The importance of maintaining credit card debt responsibly cannot be underestimated. Late or missed payments are an absolute deal breaker when looking to earn an excellent credit rating. More than any other type of loan, credit cards reap the biggest boost to your score when paid off. So if you have a choice between paying off your car loan or your credit card, opt for the plastic.

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