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How Credit Cards Can Help Your Credit Score Improve

Posted on August 4, 2010

With the recent fallout of credit card debts, many consumers feel that credit cards are the root of all evil and credit repair will fix that. But in a twist of the old cliché, credit cards don’t spend themselves. It is the consumers’ lack of budgeting and the lack of knowledge as to how credit works that has gotten many into hot water.

Credit cards are not inherently evil. They actually serve many purposes and can be a tool used to improve a consumer credit score and repair credit histories. The key is to use credit cards to your advantage and not be taken advantage of by impulsive spending.

Here are some tips for using credit cards wisely to get back in the graces of credit:

Know Your Limits

Credit card users often consider their line of credit as an extension of their incomes. If they don’t have the cash to pay for an item, they have no problem pulling out the plastic. This can cause a lot of negative credit issues. A credit card balance that is too high can have a negative impact on a credit score. If you have multiple cards that are maxed out, your debts can bring down your score. As a rule of thumb, your credit cards balances should not be greater than 20% of the total credit limit. You also should keep all of your card balances around 20% of the total limits when all is added together. If you can achieve those percentages, you can increase your credit score by 40-50 points.

Pare Down Your Accounts

If you have too many credit cards, you can be doing harm to your credit score. If you have too few cards, you may not be getting the maximum benefits. Having open, positive lines of credit to your name is a credit score booster but having the wrong amount can be detrimental to your credit. If you are unsure of how many is enough, consider your own financial situation. Can you afford to use and make the payments on each card each month? Do you feel you rely too much on credit and another card would just be adding to the temptation? There is no right answer to this situation. It is a personal choice. A good guideline would be to have two to three cards – one strictly for emergencies, one for regular use, and one more to collect on a good rewards program.

Keep Long-History Cards Open

One of the main factors in a credit score is the length of your credit history. Financial advisers will warn consumers not to be so quick to pay off and close out your credit card accounts because doing so can lower your credit score. If you close the oldest accounts you have, you are shortchanging your credit history and negatively influencing your credit score. Review your credit history report before making any decisions about your credit accounts.

Bad Credit Blues

If you have bad credit or no credit to speak of, applying for a secured card is a good way to lift up your credit score or establish a credit history. A secured card will require that you pay cash upfront and use the total amount as your credit limit. Secured cards do report back to the credit bureaus and since you have essentially prepaid your account, all information will be positive and beneficial to your credit.

Credit cards can be a great tool for boosting credit scores provided they are used properly and you have control of your debts. Never get several credit cards to help benefit your credit. Stick with only the ones that make sense for your lifestyle or you’ll damage your credit even worse.

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