Credit cards allow you to buy items when you don't have the available cash, and paying back credit cards in full helps build a good credit score. Minimal use of credit cards helps keep balances under control. Some consumers charge excessively, and, as a result, they may have a lower credit score. Improving a score involves paying down debt and keeping debt below a certain percentage of your credit limit.
Importance of Low Balances
You should not underestimate the benefit of keeping credit card balances low. Various factors determine credit scores, and two of the biggest factors that affect your credit rating are payment history and the amounts you owe. Outstanding debts account for 30 percent of your credit scoring, and increasing your credit rating involves paying down your debts and only applying for new credit when necessary. Consumers with high debts are more likely to have scores lower than someone who pays off his credit cards each month.
Credit Card Utilization
Building a credit history and good credit score requires using credit cards and other types of credit. This doesn't mean you should engage in excessive spending or carry large balances. In fact, MSN Money recommends keeping credit card balances below 30 percent of your credit limit. For example, the balance on a credit card with a $5,000 limit should never exceed $1,500. Higher utilization of available credit or completely maxing out a credit card will lower your personal credit rating.
Paying More Than the Minimum
There are methods to ensure that your credit card doesn't exceed 30 percent of the credit limit. Start a pattern of paying off balances in full each month to stop carrying a balance. This probably will involve paying more than your required minimum, which is usually only a small percentage of the actual balance. If you can't afford to pay off a charge in full each month, don't make the purchase. Leaving charges on your credit card from month to month results in additional interest, and the debt increases as you add new charges.
Checking Your Credit Report
Credit card companies report credit limits along with your account balance to the credit reporting bureaus. On occasion, credit card companies may fail to report a credit limit increase or may report the wrong limit to the bureaus. This error can negatively impact your credit score if you carry a balance from month to month, because reports may reveal a high credit card utilization ratio. Check your report each year through the Annual Credit Report website, and review each account for accuracy. If credit limit information isn't updated or accurate, contact your card company and ask them to correct the mistake or file a dispute with the credit bureau.
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