Using Credit Cards to Improve Credit Score

The credit score is key to one's financial life, and experts say it is a measure of how consumers manage credit. But most consumers are mystified as to how their behavior influences the score.

We decided to ask readers what they wanted to know about FICO scores. From the responses to our newsletter call for questions, we learned that many people are concerned about inactive credit cards they have, how many cards are too many and what you need to do to improve your credit score.

We posed these questions to Fair Isaac product support manager Barry Paperno, who has worked for the credit score keeper since 1995.

Q: A reader wrote, "I use one credit card and have two in the drawer. I want to buy a house in the next two years and wonder if I should begin using and paying off the other cards to get them on the credit report rotation to boost my score."

A: Yes, it's a good idea (to start using the other cards). The good thing about that is that you have the history, you don't have to apply for it and incur any inquiries. Depending on what the (credit) limits are and how long they've been in the drawer -- they might be expired -- there might be a couple reasons to call the issuer. One is to send you a new card, and another is to check on the limit. If it's not particularly high, see if they can increase it. Credit card utilization (the amount available versus amount in use) is such an important factor: If you've had it in the drawer for a couple of years, and it's a department store card with a $500 limit, it doesn't hurt to ask, "Can you raise that?"

Inside Credit Scores

A FICO expert discusses the effect of inactive credit cards and what consumers need to do improve their credit scores.

4 Questions for Fair Isaac Expert

1. Should you use more than one card in order to boost credit score?
2. How often should people use their cards to keep them active?
3. If you have many, will that hurt the credit score?
4. What must you absolutely do to improve the credit score?

(The reader) is probably going to benefit by having more credit available, and if it's two years later that they plan to actually buy a home, then any negative effects from opening that account, such as inquiries, will be long gone. (The reader) will be in good shape.

Again, the more you have available, the lower potentially your (utilization) percentage will be. That said, you can still have a fine score with just the one card.

How often should people use their credit cards in order to keep the accounts active?

Like just about everything, it varies, but I'd recommend using a card at least every six months to keep it active.

Q: One reader wrote saying he had 15 credit cards. If you're applying for a mortgage anytime soon, would it be advisable to close some of those cards because you have so many?

A: No, closing them is not going to help you. The score likes to see you have a (good) credit mix -- that's looking at the proportion of how many credit cards you have in relation to auto loans or in relation to mortgage loans. As long as it's on the credit report, whether it's open or closed, low balance or no balance, or old or new, if it's on the report, the score is going to count it when counting that mix or when looking at the ideal number of cards. If this person is using 15 cards or has 15 cards over the last 20 years, only three of which they use, the score doesn't care. If it's on the report, it counts it. But that's not heavily weighted, so that's nothing to lose any sleep over, either. Closing it is never going to help your score. Closing accounts could cause them to come off your report that much sooner and negatively affect your lengthy credit history.

Q: But doesn't the score penalize you for having too many credit cards?

A: Only in a very minor way. Remember the factors? You can either have too many or too few of something. You can either have too high of balances or too low of balances. The lower the better. Or if you have late payments, the longer time since you had one, the better.

If, for your particular credit profile, it's looking for the ideal number to be three, you can be hurting yourself by having one or by having five (cards), maybe equally. You can have too many or too few. So in that way, yes, it can penalize you for having too many, but in the same way that it can penalize you for having too few.

It's not a big deal. This is in the credit mix -- 10 percent. If all the big things are taken care of -- they're paid on time, the balances are low, your history is long -- that's not anything you should worry about.

6 Components of a High Credit Score:

1. Pay on time.

2. Use a card every six months to keep it active.

3. Keep credit card accounts open (unless paying an annual fee).

4. Keep the ratio of credit available to credit used low.

5. Avoid new accounts (short-term): The negative effect of opening a new account lasts less than one year.

6. Paying off credit cards improves the score more than paying off other loans.

Q: Are there some things that are absolutely necessary to increase credit scores above and beyond paying on time?

A: Well, paying on time is huge. The second thing I would say is credit card utilization. A lot of folks think that (their score should be high) just because (they) are paying (their) credit cards on time and think, "They (the credit card company) wouldn't have given me a $5,000 limit if they didn't want me to charge $5,000."

The higher percentage of that $5,000 you're using, our research finds that you're of higher risk at that point. It's been proven. So, you want to keep those balances low and, at least in the short run, avoid opening new accounts. That's kind of a short- versus long-term strategy because the negative effects of opening new accounts are in the short term, and by short term I mean less than a year.

What Makes Up Your Credit Score?

But the three things I would say are: Pay on time, keep your credit card balances low and avoid opening new accounts.

When I talk about keeping balances low, I've talked about credit cards only. Some people might ask, "What about other kinds of loans, student loans, auto loans?" The score really does not place much importance on how much you owe on those. I've talked to people who say, "I've just paid off my car loan early and it didn't help my score one bit." Well, that's because the score doesn't care if you paid off your car loan off early. You should've paid your credit cards off, dude. You should've