Responsible Use of Credit Cards
The Basics
- Pay your bills in full
- Always make at least your minimum payments
- If you can, pay more than the minimum amount due
Track Your Credit Score
Credit profiles and the responsible use of credit cards are tied to one another. Credit scores are based upon several factors, such as payment history, the number of open and active credit cards and finance accounts, the amount of available credit, how long each account has been opened, the number of recent new account applications, and the ratio of credit utilization to available credit.
All of these factors are designed to calculate the likelihood that the debtor will be able to pay their bills back.
This should be obvious, and probably is, but with the big marketing budgets of credit card companies, it is difficult to ignore the credit applications that arrive in mailboxes everyday. Credit cards are about the easiest thing to apply for, so many people do, and way too often.
Beyond that, when "window shopping" for a new car or home, without that concrete decision to go forward with your purchase, do not apply for financing at every dealership. This can have a negative effect on your credit score.
Don't carry more than fifty percent of your available credit on your credit cards. This means that if all your credit limits added together equals ten thousand dollars, don't have more than five thousand dollars on your cards for more than a few months. It should also go without saying that you must make your minimum payments during that time! Furthermore, don't carry more than fifty percent of your available credit on any individual cards. This means that if one of your cards has a $1000 maximum credit line, then you shouldn't carry more than $500 on it for more than a few months. The same rules about minimum payments applies here as well.
The above reasoning is mentioned because your score will decrease when you hit the fifty percent mark of credit utilization. It will decrease much further if you reach the seventy five percent level of available credit utilization.
If you feel you have too many credit cards, just put the ones you don't use away somewhere safe. This is commonly called "sock-drawing" a credit card, as many people just put it somewhere they know it will stay, not get lost, and more importantly not get used.
Credit advisers recommend keeping all your active credit cards open, even if they do not get used for two main reasons.
- They increase the average age of your credit history.
- They maintain your available credit.
What happens when most people close credit cards comes as a surprise: a credit score drop. This happens because the amount of available credit decreases, almost always resulting in an increase of credit utilization. If this event triggers the credit utilization to go over fifty or seventy five percent, the decrease can be disastrous.
The secret to high credit scores is obvious: a long history of responsible credit utilization. Therefore, the longer your credit cards are active, the better. When an account is closed, it is no longer considered when calculating the age of a credit report history, resulting in a lower score.
To Pay In Full, or Not Pay in FullSome people have told me that they feel some credit card companies do not value customers who pay in full. These customers have been termed "deadbeats", because they do not earn the credit card companies the high profit revenues from the interest expenses.
Furthermore, some of these same people feel that these same credit card companies will offer higher credit lines to customers who are more likely to be unable to pay their bills, and therefore more likely to incur more interest charges.
In mortgage lending, this practice is called "predatory lending", and is illegal.