Can you think of someone you know who doesn’t have a credit card? …I can’t! On a daily basis we see more plastic than cash. But that little plastic card can do a lot of damage. Use credit the correct way to grow your score!
An excellent credit score is a sign of responsible financial management. Mortgages, credit cards, auto loans and even cell phone services add depth to an individual’s credit history and can increase a credit score. Scores influence whether a loan or line of credit is approved, the higher the score the better the chance of securing a mortgage, loan or credit card.
One common misunderstanding of establishing excellent credit is that zero balances on credit accounts will earn raise a score. But that’s just not the case. Lenders want to know that you can actually manage your account and, as grand a gesture is of paying off the balance every month, it doesn’t reflect an ability to handle debt. So, even if you have the financial stability to pay the balance off each month, allow one or two accounts to carry a small balance to increase the visibility of responsible money management.
Good credit comes from handling a variety of loans and accounts. It’s impacted by how you handle fixed payments, like your car and mortgage payments. But when it comes to credit cards, there are several points that need to be addressed to help secure a healthy score and history:
Inactive Credit Cards – Should cards that are no longer in use be closed? The simple answer is ‘no’. An inactive card has no negative impact by sitting in a desk drawer; plus, older accounts have more value than new ones. In fact, if you cancel a credit card, you may see a drop in your score because your total credit limit will be reduced… an important factor in determining your credit score. You want to keep your allowable credit as high as possible, which means inactive cards should remain open.
Opening New Accounts – Opening a new credit card account does not have a negative impact on your score – unless you apply too often. Every time you apply for a new credit card or loan, the application generates a hard inquiry on your credit report. Too many inquiries may indicate financial trouble and result in the denial of your application and raise your credit score.
An Important Balancing Act – Carrying a balance on your account is not all bad, unless you are nearing the credit limit. You will see a negative effect on your score, if you max out the balance. You should never use more than 50 percent of your credit limit; a lower percentage is always better. For example, if your credit limit is $2,000, you shouldn’t have a balance of more than $1,000.
Credit Increase: Pro or Con – Asking for an increase on your credit limit may temporarily lower your score. The review process that occurs prior to an increase in your credit line may cause a dip in your score. However, an increase in your credit limit may raise the ratio of available credit to debt and raise your score.
Keep Them Active – Financial experts suggest that consumers use every active account at least once every six months. It only takes a small purchase to keep an account open and maintain the credit limit.
The importance of maintaining credit card debt responsibly cannot be understated. Late or missed payments are an absolute deal breaker when looking to earn an excellent credit rating. More than any other type of loan, credit cards reap the biggest boost to your score when managed well.
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