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Improve credit score by using credit cards

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But doesn't the score penalize you for having too many credit cards?

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Only in a very minor way. Remember the factors? You can either have too many or too few of something. You can either have too high of balances or too low of balances. The lower the better. Or if you have late payments, the longer time since you had one, the better.

If, for your particular credit profile, it's looking for the ideal number to be three, you can be hurting yourself by having one or by having five (cards), maybe equally. You can have too many or too few. So in that way, yes, it can penalize you for having too many, but in the same way that it can penalize you for having too few.

It's not a big deal. This is in the credit mix -- 10 percent. If all the big things are taken care of -- they're paid on time, the balances are low, your history is long -- that's not anything you should worry about.

6 components of a high credit score
Pay on time.
Use a card every six months to keep it active.
Keep credit card accounts open (unless paying an annual fee).
Keep the ratio of credit available to credit used low.
Avoid new accounts (short-term). The negative effect of opening a new account lasts less than one year.
Paying off credit cards improves the score more than paying off other loans.

Are there some things that are absolutely necessary to increase credit scores above and beyond paying on time?

Well, paying on time is huge. The second thing I would say is credit card utilization. A lot of folks think that (their score should be high) just because (they) are paying (their) credit cards on time and think, "They (the credit card company) wouldn't have given me a $5,000 limit if they didn't want me to charge $5,000."

The higher percentage of that $5,000 you're using, our research finds that you're of higher risk at that point. It's been proven. So, you want to keep those balances low and, at least in the short run, avoid opening new accounts. That's kind of a short- versus long-term strategy because the negative effects of opening new accounts are in the short term, and by short term I mean less than a year.

What makes up your credit score?
Credit score chart

But the three things I would say are: Pay on time, keep your credit card balances low and avoid opening new accounts.

When I talk about keeping balances low, I've talked about credit cards only. Some people might ask, "What about other kinds of loans, student loans, auto loans?" The score really does not place much importance on how much you owe on those. I've talked to people who say, "I've just paid off my car loan early and it didn't help my score one bit." Well, that's because the score doesn't care if you paid off your car loan off early. You should've paid your credit cards off, dude. You should've called me first.

Bankrate.com's corrections policy -- Posted: April 16, 2008
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