Improve Your Credit Score Using a Credit Card

I recommend keeping a credit card or two after you’ve cleaned up that financial house of yours and eliminated your unwanted debt. It’s the easiest and cheapest way to improve your credit score for one, as well as helping manage cash flow, insulating you from identity theft, and of course earning you all those free perks.

However, if you think there’s any chance in the future you’ll revert to old habits and carry a balance on a kept card, it’s best to get rid of your credit cards forever. Know that never carrying a balance is easier said than done.

It’s tough dealing with an entity whose main goal is to trick you into carrying a balance, but that’s what you’re up against. First, they make it so darn easy. I can’t think of a more convenient way to borrow money than simply paying anything less than your full statement balance. When you do that, the company rejoices. They’re now earning more than likely double-digit interest on your debt every day going forward.

Dealing with the Enemy

Credit card companies really like it when you choose the minimum payment. Now there’s a good chance they can earn double-digit interest off your debt for decades. That’s their ultimate goal. At this moment, somewhere there’s an employee of your credit card company thinking hard, trying to come up with a new way to trick you into making that happen. You must be vigilant when it comes to protecting your money, given all the folks that want it.

I hope knowing a little about what you’re up against will help with your diligence against credit card companies in the future. Again, if you think there’s any chance you’ll carry a balance, stop reading this and never charge another dime to a credit card again. Otherwise, read on and learn how to squeeze out all the good but suffer none of the bad when managing credit cards.

Carrying a Balance

When I say carrying a balance, I specifically mean you didn’t pay off your last credit card statement’s balance in full and are being charged interest. That can never happen again.  

Don’t think you have to carry a balance to improve your credit score. Even if you pay off your statement balance in full each month, as I insist you do from now on, it’s still considered credit by the credit score algorithm because they’re spotting you payment on charges made this month until next month. Every on-time payment you make shows up as a positive on all the credit reports.

Pay On Time

With most credit card companies, you have access to your statement a good three weeks before it’s due. That gives you plenty of time to do what you need to do to pay it in full by the due date.

If you can, electronically schedule your payment on the actual due date. Don’t worry if your due date falls on a weekend or holiday: Scheduling on that date still counts as an on-time payment.

If you’re carrying a balance, don’t pay on the due date. Make credit card payments as soon as money becomes available. You can really accelerate your debt elimination with early payments on credit card debt.

I’m talking here about life after debt, when you’d rather have a root canal than carry a balance on your credit card or pay after the statement due date. Once you’re there, don’t let your credit card company have their money any sooner than necessary. Keep your money around in your account longer to better manage your own cash flow or earn interest.

There’s utility in keeping your money around longer. Plus, the credit card companies hate it when you pay on the due date: They want you to pay early to increase their own utility or better yet pay late and earn them a late fee and interest.

Annual Fees and Credit Cards

Should you pay an annual fee to get more perks? It depends on your individual situation, but my short answer is no. There are plenty of cards with no annual fee that offer great perks, whether it be miles, cash back, or whatever.

The exception is if you’re a heavy user. For example, before Covid, I’d travel quite a bit for both business and pleasure. I gladly paid the $99 annual fee for a card in return for double, triple, or sometimes quadruple rewards on my travel expenses. My wife and I rarely had to pay for our leisure travel given all the perks I’d rack up.

I’ve since switched to a card without an annual fee because the utility of the card is now much less since I’m traveling a lot less.

Be a “Transactor”

Maintain what I call “transactor” status with your credit card company. Transactor is a made-up derogatory term used by the credit card industry to describe people like me. I’ve embraced the nickname, and you should too. Be a transactor.

Besides paying on time and never carrying a balance, here are a few more behaviors to add to your transactor persona that will help improve your credit score using a credit card:

  • Never “overutilize” your credit card by charging more than 45% of your credit limit on any of your credit card accounts during a pay cycle. The credit score algorithm views that as a big negative. This is true even though you’re paying the balance off in full every month.
  • Only keep credit cards that you use regularly. Underutilizing your credit card is also scored a negative, so close those cards you rarely use. If you stick to the suggested utilization limits on your remaining credit card(s), closing one down won’t negatively affect your credit score.
  • Stay away from “department store” credit cards that only work at their store. It’s easy to accumulate a lot of them. Merchants will offer discounts on purchases if you agree to open an account. Close them all down. Just having them open hurts your credit score some since these types of cards have the highest default rates.

Over time, your good transactor habits will improve your credit score by overcoming those transgressions from the past. Don’t use that high score very often, though. Best to pay cash, even for major purchases.