A good credit score can save you tens or even hundreds of thousands of dollars over the course of your life. I’m currently going through the process of getting a mortgage and I can tell you that having an excellent credit score really helps with getting a favorable interest rate. One way to boost your credit score is to use your credit cards wisely.
Fifteen years ago I had no credit score. No credit history at all. I remember having to pay a $500 security deposit in order to get a cell phone plan in my name. Today, I have an excellent credit score above 820 and a number of useful credit cards with a multitude of additional benefits. For better or for worse, I’ve never had any other types of loans in my life. I’ve built my credit score entirely by using credit cards. If I can do it, so can you.
You don’t need to have too many credit cards in order to boost your credit score successfully
Using credit cards to boost your credit score
To be completely honest, I only started paying attention to my credit score and using credit cards to improve it about five years ago. I don’t remember what my score was then. However, I do know that it was a lot easier and quicker to go from a credit score of 600 to 700 than it was to go from 750 to 800.
Depending on your starting point and your end goal, I would say if you are just starting out you could boost your credit score a good amount within just a few years. Here are the simple steps you can follow to improve your credit score simply by using your credit cards wisely.
1. Pay your credit cards bills on time
The single most important thing you can do to boost your credit score is to pay your bills on time. Payment history accounts for 35% of your credit score.
There is a simple way to always pay the bills on time. Set up automatic payments and you’ll never have to pay a $35 late fee again. This would also keep you safe from quickly rising interest rates and negative marks on your credit report.
Every month, your card company will send you an email before the payment is processed. If you don’t have enough money in your bank account to pay off your entire credit card balance, you’ll still have time to make the necessary changes.
If you miss a payment (which could happen to anyone), contact the credit card provider immediately and request that the charge be waived. Your credit score shouldn’t be affected if you call them within a few days of the bill’s due date. Don’t let it stay on your report and ruin your credit score.
My wife had this happen to her just last week because she forgot to set up automatic payments on one of her credit cards. She explained it was a mistake and that it won’t happen again and they waived the fee.
2. Pay the balance in full
As you can see in the chart above, the second largest chunk in calculating your credit score comes from the amount you owe. Keep things simple and, if you can, pay it in full. Don’t try to be cute and leave a balance on purpose because someone told you that was a more effective way to build credit.
Understandably, sometimes life gets in the way and you can’t pay the whole balance. I’d recommend paying as much as possible and creating a plan on how to pay the rest. Try to clear the remaining balance in the shortest time possible over the next few weeks or months.
This chart from my Mint account shows my debt over the last 10 years. You can see that there are some spikes but they went down within a month instead of building up and carrying debt for a long time.
3. Keep your credit card accounts open and active
Next up by importance is the average age of your credit. Essentially, this means that the longer your credit card accounts remain open, the higher your credit score.
Let’s look at an example. Say you have three credit cards, open for 5, 4, and 3 years respectively. This puts your average age of credit at (5 + 4 + 3) / 3 = 4 years. Now say you don’t like your first (oldest) credit card and want to close it and open a new one instead. This would put you at (4 + 3 + 0) / 3 = 2 years and 4 months. That would cut the length of your credit history almost in half. So keep your accounts open, especially if they have no annual fees.
Another thing to keep in mind is that you need to use your cards regularly because some companies will close your accounts due to inactivity. This happened to me with a Citi credit card and I’m still bummed out. Not only did it lower my average age of credit but it also lowered my available credit by 10%.
Don’t let this happen to you. Split your recurring bills across your credit cards. Make sure each one is used for some expense every month even if it’s just a $9.99 Spotify subscription.
4. Increase your available credit
There is another important factor that credit bureaus use when calculating your credit score. It is known as your credit utilization rate, which is simply how much of your available credit you are actually using. If your total available credit is $20,000 and you currently have a balance of $4,000 then your utilization rate is (4,000 / 20,000 * 100) = 20%.
A lower utilization rate is preferred. 20 percent is not bad, but it isn’t great either. In comparison mine is around 1-2% every month. If your credit utilization rate is too high (meaning you are using a significant portion of your available credit), this may mean that you are overextended. Lenders may view this as a higher risk of default. This is why in point #2 I’m recommending you always pay your balance in full.
To maximize your available credit, simply use your credit cards on a regular basis. Many credit card companies will automatically raise your credit line by a small amount. But there is an even better way. In your online account, you can request an increase of your credit line. Just make sure you don’t do it more than once every six months and that it doesn’t result in a hard pull of your credit report.
Bonus: Eliminate credit card fees
It’s 2021 and there are plenty of great credit cards to choose from which don’t have annual fees. This bonus tip is not going to directly boost your credit score, but it will help because you’ll save more money to make sure #1 and #2 are always taken care of.
I’m not a fan of any kind of recurring fees, and credit card fees are no exception. Ideally you don’t have any credit cards that have annual fees. If you already do, however, try calling the phone number on the back of your card and asking to have the fees removed.
If the company refuses to waive the fees, ask if you could switch to a no-fee credit card. Make sure that they don’t close your previous account to open another, because that would affect your credit score in a negative way (see #3).
Here are the four simple steps you can follow to boost your credit score by using your credit cards wisely:
- Always make on-time payments on your credit card bills.
- Automated payments protect you from late fees and make your life easier.
- If you miss a payment, contact the provider to get the late fee waived.
- Paying your balance in full will help reduce your debt, which is an important factor in determining your credit score.
- Keep your credit accounts open for a long time and use them on a regular basis.
- Reduce your credit utilization rate by increasing your available credit.
- Apply for new credit cards only if you are debt-free.
- Don’t get more than one new credit card per year.
- Request credit line increases in the online account for your credit card.
Do all of the above consistently and you’ll have a credit score above 800 just in time for your mortgage!