Do you pay your credit card balance in full each month, refrain from adding new cards, and have a squeaky clean record – yet still have credit scores lower than you’d like?
Your use of rewards credit cards may be the culprit.
Rewards cards can get you all sorts of benefits. And whether it’s travel “miles” you’re after or the cash back, using the card for all your everyday purchases gains you benefits that you wouldn’t get by paying cash.
There’s just one problem. Your credit report only shows the balance on your statement at the end of the month. It doesn’t show that you paid that balance in full and this is a new balance. Thus, it appears that you’re carrying a large balance from month to month.
The amount of credit you use in relation to the amount you have available on each card accounts for about 30% of your total FICO score. And if that balance – on even one card – amounts to more than about 30% of your credit line, your credit score is suffering for it.
When you come close to maxing out a credit line, it can drop a 680 FICO score by as much as 30 points.
When you order your free online credit report with scores, you’ll be advised as to the reasons why your scores are lower than they might be. If your credit card balances are too high, the report will tell you.
Be sure to read your report carefully, because mistakes could be a second reason. If so, correcting them will improve your scores.
So what can you do about it? First, you can attempt to have your credit line increased to allow for a nice cushion between your spending and your available credit. That might not be as easy as it once was because the guidelines are stricter since the passage of the CARD Act of 2009. Card issuers are required to consider your ability to pay if you utilized the entire new credit limit. Thus they’ll be looking at your debt to income ratio as well as your current credit score.
You can also spread your spending between 2 or 3 different rewards cards – which could very well be wise if you’re after cash rather than travel miles. Different cards offer higher rewards for specific kinds of purchases, so you could earn more cash back by keeping track of which card to use where.
If your credit scores aren’t high enough to allow for an increase or a new card, try not charging for a few months to allow your scores to increase naturally. Then go back and add one thing at a time. Remember that requests for new credit can lower your scores, so if you want to add a card, do your research ahead of time and only apply for the card that will serve you best.
Author: Mike Clover
CreditScoreQuick.com your online credit resource.
