Credit Cards Used Wisely Can Improve Your Credit Score


If you are like most Americans, you probably got your first credit card when you were right out of school. And you've probably added to your collection over the years. This is good. Having a lot of available credit can help improve your credit rating. It also comes in handy in an emergency.

But having lots of credit cards is also asking for trouble. You see something you want, some little luxury, and you just put it on the plastic. Eventually, if you do this often, your credit card use is out of control. This can destroy your credit rating.

Know the facts about your credit cards before using them. First of all, know the interest rates for each card. Rates run anywhere from 0% APR to rates in the high teens and twenties. Even those 0% APR cards come with small print, often giving you free credit for a few months, then tacking on a high interest rate when the introductory offer ends. Make sure you know how much each card charges for interest. Also, make sure you know if they have other fees, such as late fees and ATM withdrawal fees.

If you can avoid it, don't use the high-interest cards at all. Just put them in a drawer at home and forget them. They're there in an emergency, but they aren't eating away at your hard-earned cash if you don't use them. Once in a while, dust those credit cards off and use them for a small purchase that you know you can pay in full when the bill comes. This keeps them active, and keeps the credit card company happy. If you pay the bill in full, you won't be charged any interest.

Don't use more than half of your available credit on any one card. The more you use, the higher your debt-to-income ratio and creditors like to see low debt-to-income ratio. If you use over half of your available credit, pay it down as soon as you possible can.

Pay your credit cards in full every month if you can. One trick is to apply most of your paycheck to your credit card and then use your credit card to pay all your other bills. This kills two birds. Your credit card is paid in full before interest starts to accrue, and your other bills get paid at the same time. This is especially helpful if you credit card gives bonuses like airline mileage, hotel stays, or points toward other luxuries.

If you have a hard time controlling your credit card usage, make sure you only carry one card with you at any time. It's easier to control your spending if you don't have anything to spend. If that doesn't work, leave that card at home too.

If you get into trouble with your credit cards, contact the credit card companies and ask for help. You can often negotiate lower interest rates, better payment terms, or have part of the debt forgiven. However, you have to ask. And be warned: sometimes this will negatively impact your credit rating further. If they offer you a "charge-off", or a lower balance, think twice. These may help in the short run but over time the effect on your credit rating can be huge. It's better to say "No, thanks", negotiate a lower interest rate, and pay off the whole balance.

If you really can't control your credit card usage at all, many banks now offer debit cards as an alternative. You still have the convenience of plastic, but you are limited by the amount in your bank account. You can go over your limit, but the hefty overdraft charges, as much as $30 or more per incident, may make you think twice about doing so. Most debit cards also can function as credit cards for things that require them, like online shopping. If your card has a little VISA or MasterCard logo on it, you can use it anywhere credit cards are accepted. You are still limited to the amount you have in your bank account, but you do have the convenience of a credit card.

A third option is the prepaid credit card. Most big-box stores like Wal-Mart, Best Buy, and many grocery stores sell prepaid credit cards. You tell the store how much you want on the card, pay for the card, and it is loaded with the amount specified. You can then use that card just as you would any other credit card with the assurance that you can't overspend. Prepaid credit cards are a popular gift for teens and older children.

Credit cards are a part of American life and many of us don't leave home without them. Used responsibly, they can make our lives easier and more convenient.