Responsibly Managing Credit Cards
Written by Kristina Lee   


There are some rules-of-thumb that you will need to follow in using your credit cards to build your credit history responsibly. Following them does not guarantee that your credit history will be squeaky clean in a jiffy, but if you don't follow them, it might take a lot longer for your credit score to reach the upper 700's.


The Importance of Credit Limit Increases

Some credit card companies are known to be stingy with the credit that they hand out to their card members.  Since your credit score depends partially on your credit utilization (the percentage of your credit limit that you have used), a higher credit limit will lower your credit utilization and raise your credit score!

Note: You should not request an increase too often. This can result in a hard credit pull - a negative impact on your credit profile.

Tip: Do not report false numbers when you request a credit increase. Prominent credit card companies, such as American Express, are known to conduct Financial Reviews (FR's) to suspicious accounts and if false numbers are reported and found, this can result in them closing your accounts.


It is all About Keeping a Healthy Debt to Credit Ratio!

Your credit score is based roughly on the following factors: length of credit history, number of credit accounts, derogatory comments, credit inquiries, revolving and non-revolving debt amount, available credit, and debt to credit ratio. The formula to determine your debt to credit ratio is:
 

Revolving debt comes from credit accounts with pre-determined lines of credit that can borrow against at all times, such as credit cards. So your debt to credit ratio is the total amount you owed on credit cards divided by the total credit limit you have with them. The lower this ratio is, the better it is.

Example: If you have a $5,000 credit limit on your Chase MasterCard and a $7,000 credit limit on your Discover Card, and you owe $1,500 and $2500 to them, respectively, your debt to credit ratio is ($1500 + $2500)/($5000 + $7000) = 33%. Now, imagine that your credit limits are at $10,000 and $15,000.  Your ratio lowers to 16% instantly!

Tip: There is no best or optimal debt to credit ratio, although it is generally advised that it can begin to weight your credit score down as it goes above the 40 to 50 percent threshold. It is all about how you manage this balance.

Tip: The debt to credit ratio denominator is the total available credit. Thus, the ratio decreases every time your credit limit increases. So it is a good practice to periodically (say once every 6 months) request a credit line increase.


Prompt Payments as a Sign That You Are Financially Responsible

Paying your bills on time is crucial to a good credit score. Mark your calendar every month and circle the payment due date(s). Any missed payments will result in a big dive on your credit profile, and any promotions that you are receiving will end - even if it's not the same credit card you missed the payment on.

For example, if you miss a payment on one credit card (Wells Fargo), another card with a different company (Chase) may raise the APR on that card immediately, effectively ending any 0% APR rates or bonuses.

Tip: An easy way to manage credit card payments is to schedule them online with automatic bill pay. Register the credit card online with the credit card company and register your checking account to be linked to that credit card. You can schedule your monthly credit card payments online to guarantee your prompt payment.

Tip: Request your credit card companies to send you an email notification when your monthly statement is available. This eliminates the "statement lost in mail" possibility.

Tip: To simplify bill payments, change your credit card due dates to all be due on the same day.


Carry a Balance vs. Pay in Full Dilemma

Always pay off your entire balance in full each month – never carry a balance! Though the myth states that a balance shows you can handle debts, surveys indicate that people who pay off the entire balance every month have very high credit ratings - in the upper 700's!

Carrying a balance is lucrative only for the credit card companies. The goal of credit cards for them is to lend money to financially responsible individuals, risk free, who are willing to pay off the cards, and pay the high interest. Wall Street professionals can't even get the 20% return that credit card companies do!

Food for thought: the most prestigious credit cards require payment in full every month.
Last Updated on Tuesday, 21 December 2010 05:22