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Credit card debt seems to be the root of all credit evil, but it does not have to be. Responsible use of a credit card can help you re-establish bad credit. Yet, which rules of improving bad credit apply? For a credit card to improve your credit, there are specific actions on your part which must be taken into account. Here, we take a closer look.
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Your FICO Score (Credit Rating)
The first step is to understand your FICO score, or credit rating. Even though Experian no longer provides consumers with their FICO score, they (along with TransUnion and Equifax) still send FICO scores to lenders. Your FICO score is calculated based upon five categories in order of most importance to least importance: payment history, amounts owed, length of credit history, new credit and types of credit used. Credit cards play a significant role in your payment history and amounts owed, which are the two most important factors in your FICO score
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A Credit Card's Effect on Your Payment History
A revolving line of credit is a specific amount of credit extended to a borrower that can be borrowed over and over again once it has been repaid. Credit cards are a revolving line of credit that do what most other debt products do not, frequent or monthly reporting to the major credit reporting agencies. This can work in your favor or against it. If you do not make the required timely payment on your card every billing cycle then this reporting will hurt you. When you pay the required amount on time each month this improves your credit rating and helps to re-establish your credit.
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A Credit Card's Effect on the Amount Owed
The amount owed takes into account your available credit and the balance on each line of credit. Maintaining a high outstanding balance will negatively affect your credit rating and not help you improve credit rating scores. There is another side to this, however. Not using your credit will not help re-establish your credit, either. This goes back to payment reporting on credit cards. If credit is not used, then there is no balance to pay. As a result, nothing is reported to the credit bureaus. Ultimately, this means your credit rating will remain stagnate for a while. It will not get worse, but it will not get better. Bottom line, not using credit will make it harder to re-establish it.
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Which Credit Cards Are The Best Credit Cards to Improve Credit Rating ?
Once you have identified ways to use existing cards to improve bad credit, apply for a credit card to improve your credit as a next step. Unsecured credit cards are the best credit cards to improve credit rating. This type of credit card shows that you were deemed trustworthy enough to be extended a line of credit. Also, unsecured credit cards report activity the most frequently to the big three credit reporting agencies. Secured credit cards are not ideal as they indicate a lack of credit worthiness in you since you essentially had to pay to obtain the card. Some secured credit cards do report to the credit bureaus at the same rate as unsecured cards do. The best secured credit cards for re-establishing your credit, report to the credit bureaus monthly and change over to unsecured credit lines after about 18 months.
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How to Best Use Credit Cards to Improve Your Credit Rating
The following tips will allow your best credit card to improve your credit rating :
- Pay off or pay down your outstanding balance by at least half.
- Pay at least the minimum amount due on time every month.
- Use no more than 10 percent of your available credit each month.
- Avoid large impulse purchases that you cannot afford to pay when your statement arrives.
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Choosing the best ways to use credit cards to improve credit rating is important. By managing your spending and paying your credit card balance on time, you will be on your way to improving your credit rating.
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My FICO. (n.d.). Improving your FICO® credit score. Retrieved March 21, 2010, from My FICO: http://www.myfico.com/CreditEducation/ImproveYourScore.aspx
My FICO. (n.d.). What's In Your Score? Retrieved March 24, 2010, from My FICO: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
My FICO. (n.d.). Why Scores Change? Retrieved March 24, 2010, from My FICO: http://www.myfico.com/CreditEducation/questions/why-scores-change.aspx
Pierce, S. (2009, November 26). 5 Tips to Increase Your Credit Score. Retrieved March 24, 2010, from Consumer Credit Card Guide: http://www.consumercreditcardguide.com/credit-card-blogs/5-tips-to-increase-your-credit-score
Pierce, S. (2009, December 4). 5 Tips to Increase Your Credit Score, Part 2. Retrieved March 24, 2010, from Consumer Credit Card Guide: http://www.consumercreditcardguide.com/credit-card-blogs/5-tips-to-increase-your-credit-score-2
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