When it comes to FICO scores people have lots of ideas about how to build or improve credit scores. One of the most common I hear has to do with how to use credit cards. For those who don’t have a credit card, some of the most common advice that they are given is to get a credit card, max it out, and then pay it off when the bill comes. People who are giving this advice will then tell you to repeat this process, and by doing this, it will look good on your credit report and improve your FICO score because it shows you can manage your debt. If this is advice that you commonly give…stop giving it!
Here is the truth about this advice and why you don’t want to follow it. Your FICO score is a real time calculation based upon what is on the credit report, at the exact moment and time that a score is requested. Meaning your FICO score doesn’t care what your balance was last month, or the month before, it cares about what your balance is at that exact moment in time! Also it is important to remember that by the time you receive a statement on your credit card, the balance has already been reported to the credit bureaus and will not be updated until the next billing cycle ends.
Following the max it out, pay it off when the bill comes theory means that what you have most likely done is cost yourself a lot of time and tanked your score in the process. Remember that following credit score advice that is just a little bit wrong, can cost you thousands of dollars in the long run!
So what is the best way to properly handle this situation; get a credit card, only charge less than 10% of the credit limit, and when the bill comes pay it off. Repeat this cycle every 3 to 6 months just so that your new card doesn’t get closed for you. See how much easier that is? Don’t try to outsmart your FICO score, most likely all you will do is hurt yourself in the long run.