Repair Your Credit by Using Credit Cards

Your credit score is the key to your financial future. Lenders view your score as an indication of how well you manage loans and credit. However, most consumers are baffled over how their behavior impacts their score. Unbeknownst to many cardholders, you can actually improve your credit score by using credit cards. In this post, we’ll answer a few of the most common questions about credit cards and improving your credit score.

• I have one credit card that I use frequently and three more that sit in a drawer at home. If I’d like to buy a home in the next two years, should I start using and paying off the inactive credit cards to improve my credit score? Yes, you should start using the inactive cards. If the cards are expired, you might have to call your creditor to ask them to send a new card. Similarly, if the cards have very low limits, you might also call your creditor to ask for a credit limit increase. Credit card utilization, or the credit available compared to the amount being used, is critical to your FICO score, so the higher your credit limits, the better.
• How often should I use my credit cards to keep them active? This will vary by account, but it’s probably a good idea to use your cards every six months or so to keep them active.
• I have 14 credit cards, and I am about to apply for a mortgage. Should I close some of the cards beforehand because I have too many? In terms of your FICO score, it’s almost impossible to have too much credit. Closing the accounts will only hurt your score because it will decrease your credit capacity. The balances-to-limits ratio is a big determinant of your score, and closing accounts will lower your total credit limit.
• When does your score suffer because you have too many credit cards? The only way your score would suffer because you have too many credit cards is if you either had high revolving balances on those cards or if the number was inappropriate for your credit profile. For instance, if it seems like the right number of cards for your profile is four, then you might lower your score slightly if you have five cards or two cards (too many or too few).
• What do I need to do to improve my credit score besides paying on time? The second-biggest determinant of your FICO score is the amount owed, or credit utilization. If you have a card with a $5,000 limit that is maxed out, even if you pay on time, you are still hurting your score. Creditors like to see low utilization rates, meaning you only use a small portion of the credit available to you. In the short-term, you can also improve your score by avoiding opening new accounts. New accounts will temporarily lower your score and will place inquiries on your credit. Too many inquiries can also damage your score.