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May 17, 2013

Leveraging credit cards to strengthen your credit score

Randy Hopper
AVP Credit Card Lending Navy Federal Credit Union

A strong credit score can be an integral part of staying financially secure, whatever the economic climate. But for many U.S. servicemembers, determining exactly what has an impact on their score can be a daunting task.

One thing is for sure: credit cards can and do impact your credit score – positively or negatively – depending upon how you use them. In fact, credit cards can be one of your best friends or your worst enemies when it comes to your score.

So, how can you make your plastic work for you in the quest for strong credit?

Below are some tips on how to use your cards to strengthen or maintain your credit and avoid some pitfalls that may lower your score in a hurry.

Manage your debt-to-credit ratio: Closely watch your credit card balance relative to your credit limit, called your “debt-to-credit ratio.” Experts differ about the ideal ratio, but all agree that keeping your debt below 30 percent of your available credit line is key to ensuring your credit score isn’t negatively impacted. Check your statement regularly to make sure that your credit line hasn’t been reduced by your card company, thus raising your debt-to-credit ratio.

Consider a balance transfer: If you’re trying to pay down your balance, explore the option of a balance transfer. A balance transfer at a low rate makes it easier to pay down your balance, improving your debt-to-credit ratio as your balance decreases. Keep an eye out for balance transfers with no fees, zero percent interest during the introductory period and a low rate after the intro period expires. Know that the annual percentage rate on these offers can jump to more than 20 percent after the introductory window – though all credit union interest rates are capped at 18 percent.

Make all your payments on time: Timely payments establish a track record of reliability and boost credit. If possible, set up automatic monthly payments along with text and email alerts to remind you of your due date.

For controlled spending and easy qualification, go with a secured card: If you’re wary that a new credit card may make it more difficult to control spending, secured cards may be a great solution for you. They are also a good option if you have little to no credit or your credit standing is below average. Secured cards require that you provide an up-front deposit, which then equals your credit line. Because secured card limits cannot exceed what you have deposited and tend to be lower than other cards, they help you control your spending. Secured cards also aid you in establishing a track record of on-time payments. Check with your financial institution to see if they offer a secured card that can help you stay within budget and build credit.

Be smart about opening and closing accounts: As a general rule, avoid closing any card accounts. Having a higher average age on your credit accounts positively impacts your credit score. Beware not to open a large number of credit cards in a short span of time – doing so can indicate to lenders that you are overly eager for credit.

Pay down your balance as much as possible each month: Fully paying your balance helps you maintain a healthy debt-to-credit ratio. If it is not possible to pay down your entire balance, try to at least pay down some portion to manage your debt and minimize interest payments.

Maintain some level of activity: Make regular purchases with each of your cards, even if minimal. Complete inactivity can lead to the account being closed. Your credit can even be adversely impacted by inactive cards before the account is shut down.

Don’t rely on debit or prepaid cards to build credit: Debit and prepaid cards are great additions to your wallet for convenience. However, these cards draw on available funds from an account instead of a line of credit. So using them will not boost your credit.

Keeping these tips in mind, you can move forward with a sense of confidence about how to put your cards to work for you. Just remember that credit cards are one of several tools in your toolbelt when it comes to building that solid credit score.




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