Building Good Credit

One of the major factors in your credit score is how much revolving credit you have versus how much you're actually using. The smaller that percentage is, the better it is for your credit rating.

The optimum: 30 percent or lower.

To boost your score, "pay down your balances, and keep those balances low," says Pamela Banks, senior policy counsel for Consumers Union.

What you might not know: Even if you pay balances in full every month, you still could have a higher utilization ratio than you'd expect. That's because some issuers use the balance on your statement as the one reported to the bureau. Even if you're paying balances in full every month, your credit score will still consider your monthly balances.

One strategy: See if the credit card issuer will accept multiple payments throughout the month.

"A good way to improve your score is to eliminate nuisance balances," says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax. Those are the small balances you have on a number of credit cards.

The reason this strategy can help your score: One of the items your score considers is just how many of your cards have balances, says Ulzheimer.

 

So, charging $50 on one card and $30 on another, instead of using the same card (preferably one with a good interest rate), can hurt your score, he says.

The solution to improve your credit score: Gather up all those credit cards on which you have small balances and pay them off, Ulzheimer says. Then select one or two go-to cards that you can use for everything.

"That way, you're not polluting your credit report with a lot of balances," he says.

Some people erroneously believe that old debt on their credit report is bad, says Ulzheimer. The minute they get their home or car paid off, they're on the phone trying to get it removed from their credit report, he says.

Negative items are bad for your score, and most of them will disappear from your report after seven years. However, "arguing to get old accounts off your credit report just because they're paid is a bad idea," he says.

Good debt -- debt that you've handled well and paid as agreed -- is good for your credit. The longer your history of good debt is, the better it is for your score.

One of the ways to improve your credit score: Leave old debt and good accounts on as long as possible, says Ulzheimer. This is also a good reason not to close old accounts where you've had a solid repayment record.

Trying to get rid of old good debt is "like making straight A's in high school and trying to expunge the record 20 years later," Ulzheimer says. "You never want that stuff to come off your history."