How to Use & Manage Your Credit Cards to Help Credit Score

Many consumers are not aware that the way that you use and manage your credit card can have an impact on your credit score. Just paying your bills on time may not be enough to benefit your credit. The credit scoring system breaks your credit report down into 5 major factors, and if these factors are not managed properly, it may cost you money by reducing your credit scores – and thereby missing out on the preferred dates going only to the most creditworthy individuals.

One of the most important factors is Amounts Owed, which makes up 30% of your credit score.


Amounts Owed Defined: It is a record of all of your debt and how you manage that debt. This factor is broken down into two categories:

1. Revolving Debt: credit cards, and some home equity lines of credit; and

2. Installment Debt: mortgage loans, auto loans and some home equity lines of credit

According to Fair Isaac, the creator of the credit scoring system, having credit accounts and owing money on them does not make you a high-risk borrower or give you a low score. What impacts the score is when a high percentage of a person’s available credit has already been tapped. This indicates that a person may very well be overextended, making them more likely to make payments late or not at all. When calculating your score, this factor considers the following elements:

  1. The total of all the amounts you owe for all accounts
  2. The mix of amounts owed (credit cards versus installment loans, for example)
  3. The number of accounts that have balances
  4. How much of your total credit available on credit cards and installment loans you’re using (the closer you are to maxing out your available credit, the more negative the impact on your score)
  5. How much of the original balance borrowed you still owe on installment loans, such as your car loan.

Dos and Don’ts of the Amounts Owed Portion of Your Score

Luckily, the Amounts Owed Factor is one the easiest factors to correct and control. Here are some tips on how to manage your credit better in this area, giving you the opportunity to maximizing your potential for a higher score:

  • The very first step towards improving your score in this factor is to pull your credit report and make sure that the following information is being reported accurately:
  • Make sure that your credit card and installment accounts are reporting to all three bureaus.
  • Make sure that your available credit limits are reporting.
  • Make sure that the balances on your installment accounts are correct. Auto loan companies are famous for being 4-6 months behind on reporting updated balances to credit bureaus.

If any of the above information is being reported inaccurately on your reports, you could be losing 25-50+ points.

  • In order to prove to the scoring system that you know how to manage revolving debt, you MUST have active credit card accounts. Use your cards every month, for groceries, gas, etc. and pay them off every month. If you do not have a credit card at this time and your scores are under 650, immediately apply for an on-line secured credit card at one of the following banks: or If your scores are above 650, you may want to consider going to your bank to apply for a card. Exception: Do not apply for credit of any type when you are about to enter into or have already entered into a loan transaction. New Credit temporarily brings down your score due to the debt and the new account.
  • Keep credit card balances below 50% of the available limit at all times to maintain your score. 2 months prior to applying for a loan, those balances should be kept to 29% or less of your limit to maximize your scores.
  • If you cannot pay down your credit card balances to 29% of the available limit prior to applying for a loan, try calling your credit card companies to ask for a temporary limit increase without pulling your credit. Tell them you are in the process of wanting to purchase a home and that your balances are affecting your score. Some creditors will oblige if you have maintained a good payment history on the account.
  • Do not consolidate your credit card debt onto one low interest card UNLESS if after transferring the debt the balance on the credit card you are transferring to is under 30% of the available limit. But you should still use your other credit cards for small purchases as mentioned in 1 above.
  • Don’t close credit cards accounts at all, if possible. 3-5 major credit card accounts are best. I say major because the scoring system frowns upon 3rd party financed credit cards (i.e. Department Store Cards, Furniture Store Cards, etc. You will lose points in two factors when you close a credit card account, both in the Amounts Owed factor and in the Length of Credit History Factor which is worth 15% of your credit score. (These 2 factors combine to make up nearly half of your credit score, so pay attention here.) Once you close the account, the history stops counting. A common misconception by consumers is they believe when you close a credit card account, any bad history on that account goes away. This is not the case. That history stays with you.
  • Don’t open accounts you don’t need. Just because credit is offered to you, does not mean that you should accept it. When you receive one of those pre-approved credit card letters in the mail, your credit report has not been pulled yet, so you are NOT approved for the account. Once you pick up the phone to call the creditor, they will pull your report and you will be penalized immediately for the hard inquiry (10% of your score.) It is best to avoid these types of special offer credit cards (including Department Store offers of “Open an account today to save 15% off of your purchase.” The scoring system frowns upon 3rd party finance cards.
  • Installment loans are there for a reason, so paying off your car loan early will not improve your score. The scoring system wants to see that you can follow a payment agreement over a certain period of time (i.e. $250.00 per month for a period of 5 years with no late pays.)
  • Don’t go over your credit card limits, even if it’s just one dollar. Doing so deals you a double penalty and you could lose 50+ points from your score. Why? Going over your limit the system thinks that you cannot hold to a creditor’s agreement and that you are overextended. Something to note: even if you call your credit card company and they approve an additional $200 over the telephone, you still get penalized.
  • During transition of an installment loan, don’t count on escrow to pay the final mortgage payment on the previous loan. Pay it and be safe. One 30-day mortgage late can cost you 50-75 points no matter how high your score is. That 50-75 points takes a minute to lose, but several months to get back and could lose you the new loan program rates that can save you tens, if not hundreds of thousands.
  • When it comes to American Express cards, which have no available credit limits, the scoring system uses last month’s statement total as your available credit limit. This means that if you spent $5,000 last month, and then $6500 this month, it appears to the system that you are over your limit. As a result, the best way to handle AMEX is to always pay your bill before the statement date.

In Conclusion:

By following these simple steps, you can take the first step toward improving your credit score in the short term and you can maintain a better credit score going forward. Your credit score is so important to your financial well-being, and it’s so easy to manage wisely when you are empowered with the tools to be able to make a change. The reality is, most people don’t have bad credit because of financial insufficiency, but rather because they just allow their credit to slip away from them through mismanagement. Learning how to manage your credit is more than half the battle of achieving a credit score that will provide you with the financial opportunities that will make your life easier and more enjoyable.

For any questions you may have, please feel free to contact me. – Don

FICO Credit Scores – Understanding the Basics

Wonderful educational material for the consumer looking to improve, correct and build FICO credit scores that can possibly save tens of thousands of dollars in better interest rates on mortgages, cars and credit cards.  Here is the link:


Below are some of the great topics briefly discussed.   

Facts You Should Know

Why Do Scores Vary

Do Lenders Use All Three Scores

How Fast Can Scores Change

What Goes Into Your Score

What is Not in Your Score

Can I Improve My Score

Five Rules to Follow When Trying to Improve Your Credit

Disputing Errors on Your Report

If the Credit Challenges Are Too Much