Are you trying to figure out how to improve your credit score? It’s important to know that credit cards aren’t a bad thing when trying to increase your score! When we are working with homebuyers who need to improve their credit score, getting a credit card is usually our top recommendation.
In fact, it’s very difficult to have a decent credit score WITHOUT having a credit card.
We find that some homebuyers are intimidated by credit cards and are worried that a credit card will hurt their credit score. This is not true. As long as you use your credit cards the RIGHT way, it can have a positive impact on your credit score.
Here are our top 4 tips for using a credit card to improve your credit score:
1. Pay on-time, every time!
It’s VERY important for your credit score that you make all of your payments on time. One late payment can have a huge impact on your score, especially if you have a limited credit history.
The record of a late payment can stay on your credit report for up to 7 years, so make sure that you never miss a payment. If you do have a late payment, it’s important that you make your payments and catch up as soon as possible. The longer a payment is delinquent, the more it will hurt your score.
2. 20% is the magic number.
Don’t let your balance exceed 20% of your limit.
If your limit is $1000, then try to keep your balance under $200. If your limit is $300, keep your balance under $60
Keeping your balances at this level will have a positive impact on your credit score because it shows that you have credit available to you that you are not using. The closer you get to using 0% of your available credit, the higher your score will go.
Past balances are NOT reported on your credit report. If you have a credit card that is close to the limit, the most important thing that you can do is to start paying down that card as close to 20% of the limit as you can get, as soon as possible. Once that new information cycles to the credit reporting bureaus, which typically takes 30-45 days, the history of that old high balance will be replaced by the current low balance and you may see a significant increase to your scores.
3. Keep ‘em open.
Although your instinct may be to close the accounts of older cards that you aren’t using anymore, it’s actually better for your credit score to keep the account open – even if you aren’t using the card.
The credit reporting bureaus look at the length of time that you’ve had credit accounts. The longer the better. Once you close an account, you lose the positive impact of having had that account open.
4. Getting a card for score building? Use it the RIGHT way.
When you’re using a credit card to build your score, there is a proven pattern that we encourage.
Once you receive your new credit card, charge something small, no more than $20. Put the card away and do not charge anything else until your first bill comes. When you receive your bill, pay it in full. Wait 3 days, then charge a small purchase up to $20 once again. Put the card away and do not charge anything else until the next bill comes. When you receive the next bill, pay it in full. Wait 3 days, then charge a small purchase up to $20 once again. Continue this cycle, and watch your score climb!
Your credit score is not set in stone! You can improve your credit score. We work with buyers every day who aren’t able to qualify to purchase a home when they first apply, but are able to qualify within months or even weeks after making simple changes to improve their credit.
To find out what you need to do to qualify to purchase a home in Ohio, Indiana, Kentucky, or Florida, text the word HOME 33655 or click here to apply.
Originally published June 27, 2017, updated Aug. 20, 2020