From your mailbox and the mall to your evening TV time, credit card offers are everywhere.
As annoying as these solicitations are, credit cards are an important part of your debt mix and credit rating – 30 percent of your credit score is determined by the amount you owe weighed against your available credit. As credit cards become more prevalent and easier to use, it’s understandable that so many people are overwhelmed with out-of-control balances. Big balances can lead to excessive interest charges and a decrease in your credit rating.
But avoiding the swipe isn’t always the answer. Without an open credit card, your rating will be artificially low. Still, there's ways to boost your credit score.
Here are some simple ways to develop a healthy credit score without amassing a lot of debt.
We first need to understand why credit cards have become so important to credit bureaus and how they are used to formulate your credit score.
Credit scores provide information about your level of risk. Maintaining too high of a balance indicates overspending and a potential inability to pay what you owe. This can decrease your credit rating and indicate to future creditors that you might be a liability.
Try to avoid carrying a balance that exceeds 50 percent of your credit limit. Even if you plan to pay off your balance in full, your rating can still be damaged if your credit card issuer reports a large balance to the credit bureaus before you write that check.
Having more credit than you need will help you keep your balance at an appropriate level while still meeting your monthly spending needs. Call your credit card company and ask for a higher limit. Better yet, decrease the amount you charge on the card each month.
Using credit cards occasionally and paying them off quickly makes you much more credit-worthy.
It’s tempting to fall back on a line of credit when unexpected or larger-than-normal expenses arise. But credit cards should never replace a smart savings plan or be used as a casual loan. They are far too risky to be used as a rainy-day fund. Plans to pay off a high balance can easily be waylaid by an illness, job change or other unforeseen circumstance.
To avoid putting yourself at risk, make sure you have sufficient savings for unexpected situations. Make large purchases — including furniture, exercise equipment, electronics and jewelry — with cash.
If you decide to use a credit card or in-store financing to make a large purchase, make sure you have a plan to pay it off in less than 12 months. An offer that seems great at first may have unexpected fees that will be applied if the debt isn’t paid by a certain time. Additionally, the account will likely appear on your credit report as a maxed-out charge account, because the amount you’re financed is, in essence, your limit. This can greatly reduce your rating. Your score will rebound if you pay off more than 50 percent of that balance right away.
So read the fine print. Look for red flags. Be mindful of the financing type and terms. There are some things you can’t plan for. But sufficient savings and flexibility in your budget will ensure you’re able to pay off any charges in a reasonable time, which will do wonders for your credit score.