Read articles about finances, saving and community news.
Access all the commercial banking resources your business needs to succeed.
by Laura Grace Tarpley
December 31, 2020
by Laura Grace Tarpley
December 31, 2020
A good credit score isn't merely something to brag about; it can help you secure a favorable interest rate when you're applying for a mortgage, auto loan, or new credit card.
There are numerous ways to improve your credit score, including paying your bills on time and taking out multiple lines of credit. If you're working to boost your score, the most efficient plan of action may be to use one or more credit cards responsibly. One or two cards can help you achieve multiple goals and gradually improve your credit score.
FICO, VantageScore, and TransRisk are just a few examples of credit-scoring models. Your exact score will depend on which model you're looking at, and each model places a different amount of emphasis on the factors that make up your score. The most common model is probably FICO, with scores ranging from 300 to 850. Here's how those numbers break down:
• Under 580: poor
• 580-669: fair
• 670-739: good
• 740-799: very good
• 800+: exceptional
How are credit scores calculated? FICO assesses the following factors to compute your score:
• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit/inquiries: 10%
• Credit mix: 10%
Here are five ways that using a credit card can positively impact the elements that determine your credit score, from payment history to your length of credit history.
Paying all your bills by their due dates, including your credit card bill, is the easiest way to boost your credit score. This task falls under the "payment history" category, which accounts for 35% of your credit score.
Late payments of 30 days or more can stay on your credit report for seven years. However, after proving for an extended period of time that you can make payments promptly, you can always try calling the credit card company to ask if it can remove the demerit from your report, especially if you can give a legitimate reason for having missed the payment.
Your credit utilization ratio is the relationship between how much credit you can use versus how much credit you are using. It's the balance you carry on your credit cards in relation to your credit spending limit across all credit card accounts you have open.
This falls under the "amount owed" category, which makes up 30% of your FICO credit score. The less you owe, or the lower your credit utilization ratio is, the better. Avoid charging more to the card than you can handle — you should pay the total statement balance every month.
What's the spending limit on your credit card? $5,000? $15,000? Maybe it's somewhere in between.
When it comes to building credit, this spending limit can be much more powerful than you'd think. If you have a high spending limit and low balance, your credit utilization ratio will be lower than if you have a low limit and a low balance. For example, if you have a balance of $1,000 on a card with a $6,000 limit, your utilization ratio is 16.6%. A balance of $1,000 on a card with a $12,000 limit comes to a ratio of 8.3%.
How do you increase your spending limit? You should be able to call the credit card company customer service number to request the change. When I made this call, it took less than 10 minutes. You can't guarantee that they'll say yes, but they won't penalize you for asking.
If you think raising your spending limit will tempt you to overspend, you should refrain from increasing the limit. Not only will this make you accumulate debt, but your credit score could also drop if you can't afford to make payments to keep the balance low.
This strategy falls under "length of credit history," which makes up 15% of your score. If you're tired of paying off your credit card, you may be tempted to cancel the card altogether. This could be the right move for you, but if the ultimate goal is to build credit, you may want to reconsider.
Lenders want to see that you can use credit responsibly for a long period of time. The longer you have a line of credit and use it responsibly, the better it looks. Especially if a card has no annual fee, consider keeping it open — you can put it in a sock drawer or somewhere else out of sight. You should still use it once every year or two to make a small purchase (and pay it off), so the credit card issuer doesn't assume your account is inactive and make the decision to close it.
I currently have a C in the "credit age" category on my Credit Sesame report card. I only have one credit card, and I've had it for less than three years. Credit Sesame recommends owning a card for at least five years to really boost a score.
If you find yourself in a situation where you can't pay off the total balance on your card every month, your balance accrues interest — unless you have an introductory APR offer. If the annual percentage rate (APR) on your card goes down, you'll pay less in interest. This could make it easier for you to pay off your card and/or make payments on time, thus improving your credit score.
I negotiated my APR recently. My income has increased since I applied for the card a few years ago, so I called a customer service agent to ask if this factor could allow me to qualify for a lower APR. Within five minutes, my APR dropped 3%. It never hurts to call and request a lower rate.