Today is reader question time, this time we’re talking credit cards and credit scores. The question is ‘Do I need to keep a credit card balance to improve my credit score?’
As credit scores are so important, we asked our auto loans team to outline how credit cards improve credit score.
How Do Credit Cards Improve Credit Score?
Credit cards are very useful things to have around and we recommend using them a lot when rebuilding credit or filling out your credit report. They are cheap if you know how to use them, convenient and can get you out of trouble in a pinch.
Credit cards improve credit score in a couple of ways:
Increases your credit mix: Your credit mix makes up around 10% of your credit score and is a measure of how many different types of credit you use.
Contributes to your debt to income ratio: Your debt to income ratio measures how much revolving credit on your credit cards you’re using. Under 35% has a positive impact. Go over that for an auto loan and it can be viewed negatively.
Contributes to your payment history: If you have the minimum payment set up, every payment will be another positive entry on your payment history. Every help incrementally helps improve your credit score.
What To Do Next
We recommend using at least one credit card for everyday expenses because of the above reasons.
As long as you don’t buy anything you wouldn’t normally buy with the card and pay it off at the end of each month, you’re using it sensible and avoiding expensive interest charges.
You do not have to keep a balance on the card to help improve your score.
While making those minimum payment each month does have a positive impact, you can time everything so you get the benefit with none of the interest charges.
Use your credit card as we suggest, allow the minimum payment to be taken every month so you get the mark on your payment history and then clear the balance.
Do this every month and you’ll get all the benefits of using a credit card with very few downsides. It’s all in the timing!
Plus, having one or more credit cards with zero or low balances shows any future auto loan company that you’re on top of debt and demonstrates your ability to pay it off and control it.
Keeping on top of credit cards and keeping balances under control is what will help improve your score and your financial situation the most.
The less you owe when you come to apply for an auto loan, the better!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!