How your credit card habits affect your credit score

Question: I have excellent credit and usually don't carry a balance on any credit cards because I pay the entire credit card balances every month.

This keeps the low or zero introductory rate offers coming my way on a regular basis. If I decide to sign up for one of these credit card offers, I will generally pay off the entire balance just before the introductory balance is due to expire. Is there anything wrong with this approach? Is it helping or hurting my credit score? Also, does having several credit cards with zero balances have any negative impact on my credit score? How many is too many? If I use these cards once a year to keep them active and pay off the entire balance by the due date, am I hurting or helping my credit score? Jamileh.

Answer: Each credit score is based entirely on the credit information in a person's credit report at the moment it is calculated. But according to Craig Watts, public affairs manager at the Fair Isaac Corp., people who faithfully pay their entire credit card balance every month are often surprised to see a balance -- not a zero balance, but a dollar balance -- for that account on their credit report.

This occurs because creditors usually report to the credit bureaus every month the same account balance that they communicate to card holders in their monthly billing statement. "While paying off the entire balance every month is great discipline and avoids interest charges," says Watts, "it is more important for a person's FICO score to keep reported usage low on any credit cards."

In other words, for a higher FICO score -- Fair Isaac created the formulas that calculate many credit scores; therefore, the term FICO score -- consumers should keep their monthly bill low on every credit card, since that balance is likely to be the same information that is reported to the credit bureaus.

Watts also advises that opening a new credit account often will lower someone's credit score slightly, since each new account correlates, at least statistically, with increased risk of future credit delinquencies. Typically the person's score recovers over the next few months because scores improve steadily in response to on-time credit payments and low account balances.

It won't hurt your score to have credit cards with zero balances - as long as you never use the cards. At the same time, however, you also are not helping your FICO score because the FICO score is based on your credit activity, both positive and negative.

Finally, there is no single "right" quantity of credit cards for all consumers since everyone's situation is different. "Someone who is just starting out managing credit could represent a high risk to lenders simply by opening two or three credit cards in the first year, whereas someone with a long track record of responsible credit use might not raise any lender eyebrows by opening two or three cards in a year," says Watts.

The FICO score uses similar logic when assessing the risk represented by the quantity of open credit card accounts on the person's credit report. Your last question "describes rather neatly the kind of credit usage that typifies people who have very high FICO scores," according to the Fair Isaac spokesman. "Such consumers often have a long credit history of maintaining few accounts and using them sparingly, with low account balances and no missed payment deadlines."

By Lew Sichelman at http://www.marketwatch.com/