Credit cards are a significant factor in determining your credit score. Credit bureaus look at your credit card balances and history to determine how you manage your discretionary spending. The credit bureaus do not know your spending habits, but by reviewing the credit card balances, they can make conclusions regarding your ability to manage credit which will affect your credit score. If the cards are “maxed out”, or at their limit, they can negatively affect your credit score as the credit bureaus will conclude that you have trouble managing credit. On the other hand, if you do not use credit cards, or have no credit, it does not help your credit score because the credit bureaus see that you do not use credit. In order to obtain a credit score, you have to use credit. Thus, the answer lies somewhere in between.
Ideally, you want to maintain a balance of no more than 20% to 25% of the high credit limit on the card. So, if the credit limit on the credit card is $1,000, in order to maximize your credit score, you do not want to have a balance any higher than $200 to $250. By maintaining this balance, it tells the credit bureaus that you are using credit and can manage credit. Thus, it generally has a positive effect on your credit score, and can improve your score. Maintaining about 2 or 3 credit cards with these balances may be a good idea. Also, credit cards that are secured by banks seem to be more favorable than credit cards that are secured by retail stores.
We have counseled our customers on this issue over the years, and have seen scores improve as a result. If you have any questions on your credit, contact us. We will counsel you to help you improve your score so that you can purchase a home.
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John Rapasky is the President of the Counsel Mortgage Group, LLC. Copyright © 2017 Counsel Mortgage Group®, LLC