Credit Cards - Where should the balance be to maximize your credit score?
In my opinion, the best way to use your credit cards is to use only 5% to 25% of your available credit and obviously pay all your bills on time. A common myth is that you have to pay down all your credit cards to zero to get a good credit score but to prove you know how to utilize credit with a level of responsibility; it doesn't hurt to occasionally pay a card over a short period of time.
A mistake that is still happening today with consumers wishing to improve their credit score is that they are cancelling their credit cards. This will actually lower your score as it reduces your type of credit in use and possibly effect your debt to income ratio.
- Payment History (35%). The number one factor used when calculating your credit score is your payment history. For example, accounts that have gone to collections or charged off, bankruptcies or simple late payments on open accounts. The more recent the problem, the more your score will be affected.
- Amounts Owed (30%). Have you maxed out your credit cards? High balances or balances that are close to your credit limit show financial irresponsibility and thus has a negative impact on your credit score. it is advisable to keep your balances below 30%.
- Length of Credit History (15%). Are all of your accounts brand new or have they been open for a while? The longer, the better.
- New Credit (10%). Every time you apply for credit of any kind, you create an inquiry on your credit report. A lot of inquiries negatively effect your score.
- Types of Credit in Use (10%). How many current loans from companies do you have and how much of them. Is your credit too far extended, do you have a good variety of credit established, etc. These all have impacts on your credit score.