I've got a credit card, how best can I use it to improve my credit?

This has been a hotly debated topic for years.  Do you pay it off entirely each month or no?  Do you pay the minimum payment, plus some, etc? 

We find that question to be very complex, so let's first talk some simple facts...with a little opinion stuck in for good measure:

1.  Various scoring models like your credit card available balance to be much higher than what you've actually used.  It is often advised to keep that amount below 10%, but up to 30% appears to generally have minimal negative impact. (example: 1000.00 available credit line, 290.00 balance=good.  1000.00 available credit line, 850.00 balance = not good.)

2.  Regardless what you do, pay ON TIME.  Your credit card has a due date.  Typically after the due date, there is a fee applied.  Once you're 30 days late, beyond that due date, your credit score will be impacted.  Due to processing times, delays in payments being applied, flirting with that 30 days beyond is playing with fire.

3.  The higher the balance available on the card, and the less you use that total balance, the better.

4.  Issuing banks for the credit card make money from fees and from interest.  It's in their interest to see you maintain a balance and make money from you, as a customer.  While they don't want to see you default, they do like customers who make them money. Issuing banks may be encouraged to increase available credit if they see you aren't afraid to leave a balance, or use a large percentage of your balance.  In some of our clients cases, even pushing the limit of the card has suddenly resulted in the issuing bank providing a sudden increase.  This is the tricky part.  Coming from bad credit, you will have to push into this territory to have your credit line increase, but play this game with CAUTION. 

5.  Consistency, consistency, consistency.  The more money you consistently cycle and funnel through the card, the better.  On time payments are the key as well.  These banks, much like credit scoring models, all use "algorithms" to decide who to lend to, how to assess risk, etc.  If you put a lot of cash through a card, and the card determines many of those uses to be shopping/retail or airline flights/hotels, it may be determined you have more flexible spending, and thus are more stable in life.  If you are spending on gasoline, groceries and utilties, the bank will value your responsible use, but determine you're using the card for necessity.  On time payments will reward you here.  If you leave large balances for long times, and pay minimum payments, you can theorize that the issuing bank will see this as risk and no more increase.

6.  Getting a credit line increase on one card, will often lead to increases on other cards.  This is due to issuing banks doing "soft pulls" and attempting to determine your risk factor, but also find themselves some opportunity.  Keep this in mind.

7.  Banks like you to use their features such as getting a custom card made, using their credit monitoring, etc.

 

So, what's the best way to increase your score?

If you're attempt is to make your immediate score the best, due to the fact you may be heading in to purchase a car, or attempt to obtain a loan, keeping your balances between 1% and 9% are where you want to be.

It's our belief that while Fair Isaac's scoring methods aren't publicly known, that stability is calculated into your score.  In other words, if you know you want to buy a car in May, you may want to start focusing on keeping that car balance in that 1-9% zone 4-6 months prior.  They want to see your willingness to use your credit, but also maintain it.

On the other hand, as we've pointed out, if you want to increase your balances and available credit, which helps your overall score in the long run, you may need to push those balances higher.  This will cause your credit score to fall in the short term, but it's our determination that during the "building" stages, you have no choice but to engage in this behavior.  While keeping low balances and 1-9% is good for long term stability, issuing banks just don't appear to offer as much of a balance increase if they don't think you'll use it.

As you enlist the services of KnightFiCo and we move into the credit building stages, we begin to offer a lot of counseling and privately available videos for you to understand better how to manage that process.

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