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 credit card balances, they 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 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 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, a balance of no more than 30% of the credit limit throughout the billing cycle is recommended. For example, if the credit limit on the credit card is $1,000, you do not want a balance higher than $300 at any time during the cycle. By following this advice, it lets the credit bureaus know you are using credit and can manage it. This can have 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 secured by banks seem to be more favorable than credit cards secured by retail stores.

If you pay off your card every month, but max it out during the billing period, it could negatively impact your score. The credit bureaus may check the balance when it is at its max, which could hurt your score. Thus, do not charge more than 30% of the limit during the billing period.

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 you can purchase a home.

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