How to Manage Your Credit Card and Maintain a High Credit Score

In a departure for this blog, I am going to offer some advice on management of personal finances. (In case your reaction to that is to wonder who I am to offer advice on that topic, well, besides being a general know-everything maven, I have worked for one of the credit-reporting bureaus and so I know what the criteria are that are used to evaluate your creditworthiness. Plus, I happen to have an enviable credit score myself.)

First, know at least roughly what the current balance is on your credit card account. It's easy to keep charging away and not know how big of a balance you're racking up. Depending on your credit card company, you may be able to check your account balance online or by sending a text-message request via your cell phone. Do this before you make a purchase that you'll later regret.

If you know how much in charges you already have on this month's account, you can try to keep your balance to an amount you can comfortably pay off. Many people have advised that it's best to pay off your credit card balance each month. That way, of course, you avoid finance charges.

People who don't pay the full balance on their accounts often find themselves locked into a cycle of paying only the minimum amount due each month, which covers little more than the finance charge due, and thus the balance gets paid off only very slowly. And that's only if you don't make any further charges. If you continue to charge, you have an ongoing balance on which you're paying finance charges—and you've gotten yourself into a cycle that's hard to get out of. You can even find yourself owing more just in finance charges than you can afford. It's a very deadly trap to fall into.

By the way, the government has actually done credit-card holders a favor by raising the minimum monthly payment due. That may sound contradictory, but the higher payment helps ensure that you're making a dent in that balance, rather than paying a monthly amount that only covers your finance charges and thus having pretty much a perpetual balance that would not get paid off in years-- even without any new charges.

To help keep your credit card account balance to what you can pay off, try deferring some purchases or other expenses charged to your credit card to the next month's billing cycle. That way you'll have much longer to pay for that new charge--maybe six or seven weeks, and hopefully you'll have income coming in all that time, giving you money to pay for that new purchase when the bill does come. To defer that purchase probably will not be difficult if your credit card billing cycle will be ending in a few days. If you don't know the "closing date" on your account, just call the credit card company and ask.

One secret to having a good credit score is to use your credit and pay off all your debts on time—but also to have more credit that you use. An evaluation of your creditworthiness looks at what's called "aggregate credit." This means the total of your available credit including your credit cards, charge accounts, and any line of credit such as a home-equity line of credit. It's good to have an aggregate credit amount of $20,000, $30,000 or even $50,000. So it's good to have two or three credit cards. There may be times when you want to use that second credit card: it can be a way to avoid putting too much on your main card. Use that "second" card for one or more charges you will be able to pay for in full when the bill comes due, and you'll avoid increasing the balance on the other card that you're paying finance charges on. Plus, many credit cards must be used occasionally or they'll be canceled.

On the other hand, don't accumulate a large number of credit accounts. Although it's good to have a large aggregate credit number, in fact every time you open a new charge account, that is considered an "inquiry" to your account--and a large number of inquiries actually hurts your creditworthiness. So, when you are in a store and they try to get you to take out their own credit card, say No. I always do that, and I believe that's one way I've maintained a high credit score.

Update, November 10, 2011
A couple of edits have been made to this posting since it was originally posted, but only additions, not corrections.

Some credit card issuers offer a "paydown calculator" on their web sites. (I know that mine does, and possibly they all do.) This lets you see how long it would take to pay off your balance with a certain assumed monthly payment amount, and you can look at at least three such scenarios. This might be helpful to those who carry a balance on their credit card accounts.

I'd welcome comments from anyone who has found this posting to be helpful or interesting.

Copyright © 2011 by Richard Stein