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5 Ways to Use Credit Cards to Improve Your Credit Score

March 22, 2011

| Money Rates Columnist

You might look at that title, "5 Ways to Use Credit Cards to Improve Your Credit Score," and think: 'Who is he kidding? Credit cards are what got me this lousy credit score in the first place.'

But I assure you that I'm not kidding. If credit cards got you in trouble with the credit-rating agencies, they can also get you out, and it's not that hard.

Here's what you can do:

  1. Carry a lot of credit cards, but try to use only one or two of them. That may sound silly, particularly if a card has an annual fee, but credit scores are based in part on the ratio of your credit card balances to your available credit. So if you've been authorized to have, say, $50,000 in available credit, make sure you're only using 2 to 5 percent of that available credit each month. And shop for the best credit card rates.
  2. Warning: According to the New York Times, you should avoid retail credit cards with low credit limits and high interest rates; these are often subprime cards that can hurt your score.

  3. Get a secured credit card. These are cards that require you have a pre-determined amount of money placed in a bank account to serve as collateral, and your available credit is based on the size of that deposit. If you use the secured credit card lightly and pay your bills like clockwork, you can improve a score that might otherwise sit there at a low level.
  4. Warning: Avoid credit cards aimed at people with credit problems because they can make matters worse. Make sure the credit card company is going to report your account to the credit bureaus because not all do.

  5. Pay off your credit cards first. It may feel great to pay off a car loan or a home equity line of credit, but the truth is that paying off your credit cards will do the most to improve your credit score. It's also likely that interest rates on even your best credit cards are higher than your other loans, so it makes sense to pay them first for that reason, too.

  6. Carefully manage your debt utilization rate. That rate measures how much of your available credit you are using, and the people with the best credit score are those who are utilizing 7 percent or less of their available balance.

  7. Pay your credit card bills on time. There are certain late payments that will always be reported to the credit reporting agencies, and one of them is your credit card bill. If you're having trouble keeping up with that bill, you can call the card company and ask to set up a payment schedule that you can keep. But before you do that, ask how the credit card company is going to report this to the three major credit bureaus. You want them to say the new arrangement is 'paying as agreed.' Having the new payments going in as 'not paid as agreed' will hurt your score. Make sure you get the terms in writing.

It's also important to regularly check your credit report and your credit score. Your credit report from each of the major credit reporting bureaus--Equifax, Experian and TransUnion--is free at annualcreditreport.com. Your credit score will cost you. Two versions of the so-called FICO score - named after the Fair Isaac Corporation that created it two decades ago - costs $19.95 at myFICO.com. You can get one FICO credit score for $15.95 at MyFico.com.

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