Getting confused about how to use your credit cards for the best effect on your credit scores?
You know you need credit card accounts - you've been cautioned not to close any accounts, especially your oldest accounts.
You've heard that you shouldn't carry a balance of more than 30% of your available credit in a given month. You know that if you do charge more, you should go on line and make a payment before your monthly credit card statement is generated.
But, do you need some kind of balance on those cards each month?
It turns out that yes, you do. But you don't need to carry that balance and pay interest on it. The best strategy for using a credit card to raise your credit scores is to use it each month for some small purchase - and then pay the balance in full when your statement arrives.
This demonstrates that you're using credit wisely and paying your bills on time. That factor is one that has frustrated more than one cash purchaser when they've tried to get a mortgage loan.
Many cannot understand how they can have poor credit scores when they don't owe a dime. But not owing a dime doesn't prove a thing to creditors. They want to see that you can owe, and then pay as agreed.
Thus, seeing a small balance and a notation that indicates "pays as agreed" looks better and will improve your scores more than seeing no balance. 35% of your FICO score is based on your payment history - how you handle debt.
Your credit card debt is reported to the credit bureaus when your statement is generated each month, so the dollar figure that you owe on that day is the number that's reported.
That's why it's so important to pay large balances before the statement is generated. The way credit reports are set up, no one can see that you charge $4,000 in business expense each month, and then pay it in full. All they see is the $4,000 balance. If the credit limit on your card is $4,200 - it looks like you've borrowed to the maximum.
30% of your FICO score is based on the amount you owe vs. the amount of credit available to you - so keeping debt under 30% of available credit is a huge boost to your scores.
If you think you may want to use credit in the near future, start using your credit cards as a tool to boost your credit scores. Sometimes just a point or two can make a difference in the interest you'll pay.
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