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By Thomas Muellner
It’s understandable to be leery of the mysterious factors that influence your credit score. With most of us having a very limited view into the exact formula that credit bureaus use to calculate this important three-digit number, it makes sense that some consumers shy away from using credit cards altogether rather than risk negatively impacting their score. Pages long credit reports, tons of fine print, and a lingering financial crisis aren’t exactly helping ease the minds of consumers either.
But by keeping your credit cards locked away, you may be leaving a major opportunity to bolster your credit score on the table. Keeping a zero balance month-over-month is great, but being active with your credit cards can put you in an even better light with lenders, provided you are also responsible in how you use your cards. Here’s how you can separate common credit card myths from fact and use your plastic to its full potential.
When you’re first approved for a new credit card, you’re assigned a spending limit that’s based on a range of factors, including your credit score, current income and any existing debts. This limit, plus the spending limits of any other credit in your name, helps determine your amount of total available credit. Think of this as the ceiling borrowers have set for your spending - how much they feel you’re reasonably capable of paying back.
Similarly, the percentage of credit you’re actively using is referred to as your credit utilization, a key factor in determining your credit score. For example, if you have a single credit card with a $4,000 spending limit and a balance of $2,000, your credit utilization rate is 50 percent. As a best practice, it’s wise to keep this rate to under 30 percent to be in the best possible standing with lenders.
While the easiest way to improve credit utilization is to simply pay off your balances each statement period, you may find yourself in a situation where you’re routinely close to going over your credit limit even though you’re spending responsibly and paying off your balances.
And there’s the potential opportunity.
It’s common for lenders to do a hard pull on your credit when you initially apply for a credit card, which negatively affects your credit score. But some cards only do soft pulls when you ask for a credit limit increase, and soft pulls have no bearing on your credit score, so there’s no harm in asking for an increase. Be sure that you ask whether they do a hard or soft pull before you officially request the credit line increase, though, as you don't want the dip from the hard pull to counteract the boost you get from lowering your utilization ratio.
Additionally, if you’ve recently received a raise, established a new source of income, or are planning on using a large share of your available credit for a specific purchase, it may be worthwhile to contact your credit card provider to discuss a credit line increase. It’s an easy option that’s available to everyone, yet many people don’t even think to make the request.
Another tactic for boosting your credit score is to become an authorized user on a relative or close friend’s established credit account. This is especially helpful for individuals who don’t have a deep credit history of their own.
Being an authorized user lifts your total available credit limit and ties an additional item to your personal credit history. The more credit you have access to and the more accounts you’re able to show you can use responsibly, the better you look as a borrower. But beware; if the friend or relative you attach yourself to has less-than-stellar credit, it’s likely to have an adverse effect on your own credit score.
Similarly, inviting a trusted contact to become an authorized user on your personal account can have benefits. Additional users help raise your total available credit limit and can buoy your score if the authorized user’s credit score is above average (or at least higher than yours).
However, the terms and responsibilities of becoming an authorized user should not be confused with those of co-signing a loan. Unlike co-signers on loans, authorized users on credit cards are not legally responsible for the debt they accumulate - the primary account holder is. Because of this, being added as an authorized user is less risky than co-signing a loan, but should still be done with careful thought.
Once you’ve sifted through the myths and identified opportunities where you can improve your credit score through credit line increases and authorized users, taking the next step is easy. So, dust off your card and dial - a better credit score could be a simple phone call away.