Credit Card to Help Improve Credit

With credit cards being criticized for their high interest rates, it's easy to forget that when used properly, credit cards make positive contributions that actually improve your credit score. As long as you don't go overboard and you know what the credit reporting bureaus are watching for, using your card responsibly can help you build your credit history and get the best terms on your big-ticket student loan or mortgage.

Watch Your Credit Use

Barry Paperno, a product support manager for Fair Isaac Corp., recommends that you keep your credit use relatively low. People who use a higher percentage of the credit available to them are higher risk, so if you regularly eat up 90 percent of your $5,000 credit card limit, you'll have a lower credit score than someone with more moderate credit usage habits, he told Bankrate. In her article "9 Fast Fixes for Your Credit Scores," MSN Money writer Liz Weston recommends that you don't use more than 30 percent of your monthly credit limit. Keeping your spending at around 10 percent is ideal. Spread your credit use between cards to avoid the balance in any one account from creeping up too high, or make a payment before the statement closing date to reduce the amount reported to credit bureaus.

Always Pay on Time

Paying on time accounts for the biggest chunk of your credit score -- a whopping 35 percent. To build a solid credit score, never miss a payment on your cards. Set up automatic payments from your checking account every month if you have trouble remembering. Know that you don't need to pay high card interest to create a credit history. The most effective strategy to keep your credit score and pocketbook cushy is to pay off your balances in full, on time, every time.

Avoid Applying for More Credit

Avoid the temptation of customer rewards programs and frequent flyer miles that encourage you to sign up for more credit than you need. Applying for credit hurts your score, so toss those pre-approved notices in the trash and stick to the cards you already have. Nevertheless, Paperno advises putting the impact of applying for credit in perspective. If getting a new card means that you can keep your monthly balances in that magic 10 to 30 percent range, applying for credit can contribute to long-term credit score improvement. The negative impact of a new credit application only lasts about a year, Paperno told Bankrate.

But Don't Close Existing Accounts

If you have cards sitting in your junk drawer, pull them out and start using them again. Closing old accounts doesn't help your credit score and can actually hurt it, Weston notes. Always repay the balance in full. Weston recommends using older cards to make regular payments, such as utility bills, and setting up automatic withdrawals from your bank account to pay the balance off in full. This kind of practice sets up a solid use and repayment history and improves your credit score.