Using Credit Cards to Boost Your Credit Score

You can improve your credit score by using credit cards properly. FGC/Shutterstock

A low credit score will hurt you when you try to get any kind of credit. Although you may not be refused new credit, you may not get the best interest rates. You also will not be given large amounts of credit or longer repayment periods to pay back the debt.

Fair or even bad credit scores can be improved.  It will take time, but any effort you put toward improving your credit score will be worth it if you ever plan to borrow money or get a credit card with a low-interest rate.

The Fastest Way to Raise Your Credit Score

The largest companies that determine your credit score (Equifax, Experian, and TransUnion) use similar methods to calculate the score. The two biggest factors that affect your credit score are paying at least the minimum amount of your bills on time (35 percent of your credit score) and how much debt you have compared to your available credit (30 percent). This latter number is always given as a percentage.

Just paying attention to these two factors will enable you to raise your credit score quickly, and if you already have a good credit score, maintaining them will raise it further.

Standard, Secure and Charge Cards

Let’s look at three types of credit cards that can be used to improve your credit score.

The first and most common is the standard credit card. A standard credit card card comes with an interest rate and a credit limit.

A second kind of card is a secure card. This card works the same way as a standard credit card–with one exception. You will need to pay a security deposit to use this card.  The amount of the security deposit will correspond to the card’s credit limit:  a higher security deposit will equal a high credit limit.  Security deposits may be anywhere from $49 to $5000.  The card issuer holds the deposit until you close the account.  If you default on payments, the deposit will be used to pay the balance.

There is a fee attached to many secure cards, and you will need to pay the minimum amount billed each month to raise your credit score. In most cases, you will need to use the card for a year–possibly longer–before the card issuer offers you a standard credit card.

A third kind of card is a charge card.  Charge cards do not have pre-set spending limits, and generally require card holders to pay their balance in full each month or incur a fee.  Because of this, balance and credit limit from these cards are not factored into your credit score.

Like other credit cards, charge cards can be used to raise your credit score.  However, to get a charge card you must already be rather well-off and have a good to excellent credit score.

Several major U.S. credit cards are seen in New York City on May 20, 2009. Spencer Platt/Getty Images

Old and New Cards and Their Impact

Getting a new credit card can be beneficial. The new credit available–will instantly lower your debt to credit ratio.

Keeping older credit cards–even those you have not used for some time–will also keep your debt-to-credit ratio lower.  Conversely, closing them will raise your debt-to-credit ratio.

Keeping the older credit cards will also help your credit history by showing that you have had credit for some time–which counts for 15 percent of your credit score.  Your credit history–averaged across your accounts–comprises 15 percent of your credit score.

Be careful not to get too many new credit cards:  this could damage your credit score further by making you look like a risk to lenders.   In addition, when you apply for a new credit card, potential lenders will access your credit report–what is known as a “hard inquiry”–which will temporarily lower your credit.   Every new credit card also lowers the average age of your credit.

In any case, you should keep an eye on the monthly statements of all your credit cards to ensure no one else is using them.

Look for Credit Reporting Errors

Before getting a new credit card, review your credit report.  If you find errors, contact the company that put them there and have them corrected. Removing them from your record will raise your credit score, but it may take a couple of months before the correction appears on your credit report.

Once You Get A Credit Card:  Building and Improving Credit

After you get a credit card or secure card, you will want to make some small purchases with the card. Forbes advises that you do not put more than 30 percent of your available credit on the card. To find that limit, simply multiply your total available credit by .30. For example, if your card’s credit limit is $200, multiply by .30, and you will see that you should not put more than $60 on the card.  You will do even better if you do not put more than 10 percent of your available credit on the card and pay it off in full each month.

To reiterate, it is very important that you pay the minimum amount due 0n time each month. Failing to do this could hurt your credit score even more. You will need to continue to make small purchases with the card and pay on time. Credit reporting companies look for your ability to regularly pay on time before raising your score.

A late payment report can stay on your credit report for over seven years–but its impact on your score will become less over time.

Reducing debt–whether it be from credit cards or loans–will help your credit score.  Potential lenders look for your ability to control credit and reduce debt.   Therefore, it’s best not to make new charges to credit cards unless you can pay them off each month. The exception would be the cards you are using to build your credit score by establishing a payment history.

Paying your credit on time can improve your credit score. NicoElNino/ShutterStock

Negotiating With Your Credit Card Company

If you have an existing credit card, Business Insider suggests that you contact the credit card company and see if you can raise your credit limit. This will instantly lower your debt-to-credit ratio, which will raise your credit score.

Business Insider mentions another interesting way to get a better credit score. Call your credit card company and request a lower interest rate.   A lower interest rate could make it easier for you to pay off your balance or make timely payments.

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