May 29, 2012 at 12:41 pm
By Stacey L. Bradford
Although Americans are learning to depend less on credit, card use increases during the summer because of vacations and seasonal purchases. Stay disciplined in your spending with these guidelines.
1. Don’t Max Out Your Cards “It’s the biggest mistake,” says John Ulzheimer, president of consumer education for SmartCredit.com. “It’s almost as damaging to your credit score as making a late payment.” Maxing out your cards increases your credit utilization ratio (the amount you spend versus your line of credit). To maintain a high credit score you need a ratio of less than 30%—it’s part of the category that makes up -nearly one-third of your score.
Even if you pay off your balance each month, the amount you charge still matters. That’s because card issuers typically report your usage to credit bureaus on a monthly basis—and since everyone is on different payment cycles, you can’t assume you will have had the chance to make a payment. If you apply for a mortgage or auto loan while temporarily carrying a big balance, the lender may see it.
2. Rotate Usage Sorry, but locking cards in a drawer will not improve your finances. You actually need to use them on a regular basis—at least once every six months—to keep accounts current. Let them collect dust and you run the risk of your bank canceling your card.
3. Think Twice Before You Cancel A card that is canceled—either by you or the issuer—can be bad for your score. It decreases your credit utilization ratio, says Beverly Harzog, credit card expert with Credit.com. A closed account also decreases the average age of your credit history, which is 15% of your score.
While there’s no ideal number of cards to own, most people stick with three to five main cards like Visa, MasterCard or American Express. If you’re unhappy with a card—say, the annual fee is too high—it’s okay to replace it with a more advantageous one. (Swapping it for another card helps maintain your credit utilization ratio.) Just don’t get in the habit of opening and closing accounts.
4. Forgo Cash Advances “Don’t use your credit card to get cash unless it’s a life-or-death situation,” Harzog says. A cash advance generally incurs a fee and also has no grace period—the issuer immediately starts charging a high interest rate on your transaction, she explains.
5. Automate Payments The most important thing you can do to maintain a healthy credit score is pay your bills on time. (Your payment history makes up 35% of your score.) Set up automatic payments from your checking account. If you’re worried about not having enough to cover the balance, arrange for email reminders from your bank or credit card issuer. Never let that due date slide.
One Card Does Not Fit All
Consider: Small Business Cards
You don’t have to run a company to qualify. Anyone who charges client dinners and work expenses can apply. Small business cards may keep your credit utilization ratio low: Issuers may not report balances to the credit bureaus unless you default on payments, says Ulzheimer.
Beware: Reward Cards
As attractive as reward cards sound—earn 1% cash back on every purchase!—they’re best suited for people who pay off balances monthly, since interest rates can easily exceed 20%. “Carrying a balance with an excessive interest rate negates the value of the rewards,” says Harzog.
Avoid: Store Cards
Although 15% off your purchase may sound tempting, you’re better off declining. Retailer cards typically have low credit limits, so a small shopping spree could push your credit utilization ratio too high. Store cards also tend to have interest rates hovering around 20%, so an unpaid balance nullifies your discount, says Ulzheimer.
Financial expert Stacey L. Bradford is an award-winning journalist and author. When she isn’t writing, she’s busy teaching her kids the value of a dollar.
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