Credit is an important part of everyone’s personal finances, whether he or she realizes it or not. One needs a strong credit score to do many critical things, such as obtaining a mortgage or applying for a car loan. If one has poor credit, there are various strategies available to improve a credit score. One strategy is through proper and strategic use of credit cards.
Never Make Late Payments
A person’s credit score is a measurement of how one manages debt. In other words, it matters when and how one borrows money and pays it back. For a strong score one should aim to compile a record of on-time payments on debts owed. If a person has never made such payments it does not mean he or she has good credit. It actually means he or she has no credit whatsoever.
If one is not already making loan payments, he or she should charge some regular expenses on a credit card which helps establish a credit history. There should be no lasting debt incurred as long as one pays off credit cards in full every billing cycle. The card issuer will then report the on-time payments to the credit bureaus. Additionally, by paying in full, one will be able to avoid paying interest charges which will be better for personal finances.
Keep A Budget
One possible risk of using credit cards to improve one’s FICO score is that one’s bank account balance does not change after making a purchase. The money only leaves the bank account after paying a credit card bill. Therefore, if one is not careful, he or she might lose track of personal expenditures and finances.
This is why it is a good idea to maintain a regular budget whether or not one is using a credit card for purchases. In this way one will know how much money he or she has available to spend. Essentially, one should treat his or her credit card as if it were a debit card. The more focus one puts into restraining spending within one’s means the more likely one will be able to avoid paying high interest rates and carrying a balance.
Maintain A Low Balance
Keeping a low balance on one’s credit card is essential to receiving a good FICO score. The second most significant factor in determining one’s FICO score is how much debt one currently owes. Current debt amount owed makes up 30% of a person’s FICO score. Additionally, FICO also takes into consideration one’s credit utilization, or in other words, the current balance as a percentage of a person’s available credit. In general, one should try to maintain a credit utilization rate of 30% or lower.
Keep Accounts Open
Creditors want borrowers who are predictable. It is better if one uses his or her credit over longer periods of time. Therefore, it is important to keep one’s credit card accounts open and active. This means one will have to make sure to use a credit card account at least every once in a while. When a credit card account with no balance remains unused for long periods of time it is quite common for the credit card issuer to close the account.