Having a great credit score can save you thousands of dollars over the course of your life, make all the difference when it comes to getting the apartment or home of your dreams, and even make you more employable. But these days, a good credit score isn’t what it used to be; since the recession, most banks want borrowers who have credit scores in at least the 700s.
How can you give your credit score the boost it needs to qualify you for the lowest interest rates and even make you seem more appealing to the best employers? By using credit cards wisely, of course. By making smaller payments throughout the statement cycle, raising your credit limit, keeping old cards active, and carrying the right debt-to-credit ratio, you can present yourself as a much better credit risk. But if you don’t have any credit cards or want to open a new credit card account, be careful; applying for too many new cards at once can harm your credit.
1. Make Several Payments Each Statement Cycle
If you’re like many credit card users, you make a single payment on your card each month, when the statement comes due. If you’re an especially good card user, you pay off the balance in full each month to avoid paying interest charges. But what you may not realize is that, by making a single, large payment, you could be hurting your credit.
That’s because your debt-to-credit ratio — the amount of your available credit you’re currently using — accounts for about 30 percent of your FICO score. Your bank reports your credit utilization ratio each month, on a random day of its choosing, so that getting close to your credit limit can hurt your score even if you pay off the balance in full each month. Making smaller payments throughout the month can lower your credit utilization ratio and increases the chances that you’ll have a low ratio on the day your bank reports your utilization.
2. Raise Your Credit Limit
Another way to boost your credit score, using the same principle of debt-to-credit ratio, is to ask for a credit limit increase. If you can pull this off, it will allow you to lower your credit utilization ratio without suffering any hard credit inquiries, those dings on your credit that occur when you apply for a new credit card or line of credit. If you want to go this route, make sure you’ve been a customer in good standing with a good payment history; otherwise, it could backfire and you could find yourself with a lower credit limit.
3. Keep Your Debt-to-Credit Ratio Low
So, just what is an acceptable debt-to-credit ratio, anyway? Ideally, you should use no more than 10 percent of your available credit — that means 10 percent of the credit limit of all your cards and credit lines, added together. Keeping your credit utilization to less than 10 percent of your available credit will allow you to boost your FICO score to maximum levels. If that’s more than you can handle, aim for less than 30 percent.
4. Keep Your Cards Active
You might have old store cards or other credit cards lying around that you no longer use, and it might seem like a good idea to cancel those old cards. You probably think that closing the accounts protects you from credit card fraud. But closing old accounts can also lower your credit score, since it means you’ll have a higher debt-to-credit ratio.
So keep those old accounts open — and use them once in a while to keep them active. Even if you make a small monthly purchase on each of your old cards, you’ll be doing your credit score a world of good.
5. Refrain from Applying for Lots of New Cards at Once
Each time you apply for credit, you get a hard inquiry on your credit report — and lots of these at once can harm your credit score, since it makes it look like you’re trying to open lots of credit accounts in order to rack up lots of debt.
Instead of applying for multiple cards in the hopes of getting at least one of them, carefully research the right card for you, boost your credit as much as possible, and then apply. If you don’t get the card, do everything you can to boost your credit score over the next three to six months, and then try again. If you’ve already made the mistake of applying for multiple cards at once, don’t worry; those hard inquiries should only stay on your report for about two years.
Credit cards can be a great way to build credit and boost your credit score, if you use them correctly. Keep your debt-to-credit ratio low, keep those old accounts active, and hold back from applying for multiple credit cards at once, and you’ll soon be the proud owner of a desirable FICO score.