How to Maximize Your Credit and Avoid Penalties
Many people believe that always paying their credit cards on time and in full is the road to maximizing their credit. It’s true that this is an important step — on-time payments alone make up 35 percent of a FICO score — but it’s not the only one. There are several additional things to consider if you want to have the highest score.
Paying in Full Each Month Isn’t Enough to Maximize Your Credit
Watch Your Balances
It’s a common misconception that always paying your cards in full after you get the statement means never carrying a balance. This isn’t true — all it means is that you weren’t charged interest. Your balances are calculated based on the statement, and the percentage of those balances that you’re using makes up 30 percent of your FICO score. To avoid a scoring penalty, you want your balances below 30 percent. For a maximum score, you want your balances below 10 percent.
Say you have a $1,000 credit limit on one card and charge $800. You get the statement and set it to pay on the due date (and it does). You’re not good! When your statement reported to the credit bureaus, you were using 80 percent of that card’s limit, and, if it’s your only card, 80 percent of your overall credit limit. Both having a single card close to maxed out and having your entire limit close to maxed out will each do major damage to your score.
Now add another card with a $1,000 credit limit and no charges. Your overall utilization is now $800 out of $2,000 or 40 percent. That in itself will drop your credit score a little but not by nearly as much as when you were maxed out. However, you still have that almost maxed out card dragging you down.
Check Your Spending
The key in the above examples is to check your spending. When you hit $300 on one card, switch to the other and don’t spend above $300. If you need to make a larger purchase or you spend more each month, pay the balance down to $300 before the statement is issued. That way only $300 will report to the credit bureaus even if you actually spent more.
Ask for Periodic Credit Limit Increases
One way to avoid having to manage your balances so closely is to ask for credit limit increases. With most banks, you simply need to fill out an online form. Three times your current credit limit is a good new limit to ask for because it is the biggest increase a lot of lenders are willing to grant. Even if they won’t grant the entire increase, they’ll almost always tell you if they’ll approve you for a lower amount.
The thing to watch out for here is credit inquiries. There are two types: hard inquiries and soft inquiries. Soft inquiries are good because they don’t affect your credit score. If you just see an online form that doesn’t have any language about pulling your credit report from the bureaus, it will usually be a soft inquiry. Otherwise, it will be a hard inquiry. Hard inquiries do temporarily drop your credit score by a few points, but the effect is completely erased after one year. If you’re planning to apply for a loan within that time and want to know for sure if the bank will use a hard inquiry, call them and ask.
Don’t Put All of Your Eggs in One Basket
It’s possible to achieve a nearly perfect credit score with credit cards from only one bank, but this is a horrible idea. If you choose to leave that bank or they decide to close your accounts, your entire credit history will be erased. It’s OK to have one bank as your primary bank but try to have a card from at least two other banks.
Do you know of any other tricks for maximizing your credit score? Tell us in the comments below!