Many credit card holders stick to paying off their credit card debt each and every month. If the goal is to stay out of debt, this is the ideal way to do so. If you are trying to build your credit rating and credit score, however, paying off your cards each month can be a bad idea. How does this work?
The thing to remember is that lenders and creditors do not make money from the annual fees that they charge on their credit cards. Their money is made on the interest that is charges on the balance each month. If you are paying off the balance every month, then the creditors are not making that money. They want to have lenders that have a balance each month and make regular, monthly payments. This is what shows your credit worthiness and builds your credit score.
It is very easy to calculate your debt to credit ratio. For example, if you have a credit card with a $10,000 limit with a balance of $2500, your debit to credit ratio is 25%. The ideal ratio to keep your credit score at a high level is 30-35% and this ratio is based on the combined credit card limits and balances.
One way to increase your credit score is to work around this. This can be done by asking the creditor to raise your limit to lower your credit to debt ratio. If you have a credit limit of $5000 on one credit card and a balance of $3250, your debt to credit ratio would be around 75%. If the credit raised the limit to $10,000, this would lower the credit to debt ratio substantially to around 35%. If you have multiple cards, there are many options to achieve this ideal credit to debt ratio by upping the limits on some cards and paying down some of the others.
If you know that you are going to be buying a home or car soon, move towards this ratio several months before shopping for a loan. Once you get this loan, you can allow this ratio to move to a more manageable level. The key is to make all your payments on time and stay on track of your credit. This will be the best way to get your credit score up.