If you’re trying to repair your credit or bump up your credit score, look no further than your own wallet. Much of your credit score is based on managing debt and paying bills on time. And while you won’t get approved for a mortgage or other major loan without good credit, there is one form of revolving credit you’re probably already managing: your credit cards.
Misused, credit cards can get you into trouble. But managed properly, credit cards are a powerful tool for proving your ability to handle debt. Here’s how to use your credit cards to build – not bust – your credit.
Start with the best credit cards you qualify for
Paying off unsecured credit cards builds credit faster, but if you don’t qualify for one, start with a secured card. The difference? You’re required to back secured cards with a cash deposit, which acts as your credit limit. Cards such as the Discover It (both the secured and unsecured versions) send your FICO score with your monthly statement, so you can keep track of progress.
Pay your credit card bills on time
– and the rest of your bills too. Payment history counts for 35 percent of your FICO Score – the biggest chunk – and takes some patience to repair. Consistent and timely payments are the single most important thing you can do to improve your score. One tip? Use auto-pay for recurring bills when you can, or set reminders for a few days before bills are due.
Try to avoid collection
Once a debt goes to a collection agency, it’s on your record for seven years. But if you can keep a clean record of payment for a year or more, you’ll see your score improve. In the end, sustained on-time payments will trump past credit history. The easiest way to avoid collection? Pay your bills on-time (in full, when you can).
Keep your balance low
Your credit card is a form of revolving debt, the kind that most impacts your score. You don’t have to pay your balance in full every month in order to establish payment history, but keeping it as low as possible will help with that other big factor in your FICO score. “Amounts owed” accounts for 30 percent of your score. Good news: it’s easier to fix than payment history. Along with keeping individual balances to a minimum, focus on paying down your overall credit card debt.
Think twice before canceling your credit cards
While you might be tempted to cancel all but one card, over-consolidation of your credit cards can backfire. Owing the same amount over fewer open accounts can actually lower your score. As long as you’re not paying exorbitant fees, keep unused credit card accounts open for now. Your oldest accounts establish credit history – another important factor in your FICO score. More importantly, spreading out – and paying down – your revolving debt is a good strategy.
Don’t open too many new accounts
On the flip side, however, don’t apply for a bunch of new credit cards thinking you’re increasing available credit – especially if your credit is new. Each application causes a hard pull on your credit by the card issuer that will ding your score. Worse, card churning (rapid-fire account applications) can mark you as a credit risk.
It may seem complicated, but it’s simpler than it sounds. FICO encourages responsible use of credit cards. They’re looking at how we manage the revolving debt we have in order to judge if we can handle more. Your credit cards are the best means of proving you can be trusted to pay back a loan – better yet, multiple loans – in a timely, consistent way.