Credit scores are decisive factors in many financial situations.
Credit cards are easy to get and used on a very wide scale.
But how exactly do credit cards impact credit scores?
Opening and closing credit cards can be either beneficial or damaging for your credit score, depending on the circumstances.
From using credit cards to build up your credit history, to accumulating debt that will do the opposite, here’s how credit cards have an impact on your credit score.
How do credit cards impact your credit score
Opening a new credit card
Opening up a new credit card or applying for your first one is usually beneficial for your credit score.
Applying for a first credit card is often recommended if you don’t have a credit score at all but need to start building one somehow.
On one hand, the sooner you apply for a credit card, the better. Part of your FICO score is calculated based on the age of your credit.
On the other hand though, applying for a credit card may lower your overall score, if you haven’t opened up any new credit cards recently.
Your credit age impacts your credit score by 15%.
The age of your oldest account and the average age of your other accounts put together count towards your credit. Naturally, opening up a new account up lowers the average age of your credit history.
Another factor that impacts your credit score is applying for credit cards too often. Even if you stay out of debt, it might hurt your credit history rather than help it!
Each time you apply for credit, issuers will perform a credit check.
This can have a negative impact on your overall credit history, even if you don’t sign any contracts with the credit card companies.
Applying for too much credit in a short time span usually means you’re not financially responsible.
Why would you apply for so many credit cards in such a short period of time? That’s just fishy business!
Opening up a new credit account might be beneficial to raising an already ‘hurt’ credit score though.
Too much debt has a negative impact on your score, but by upping your available credit limit, you could help boost you credit score.
Of course, do not use your new and improved credit limit to get into even more debt!
Closing a credit card account
It’s tempting to close up credit card accounts once you got out of debt or if you realize you’re not using old credit cards anymore.
However, in some cases, doing so might negatively impact your credit history.
By closing up a credit card, you’ll automatically lower your available credit and up your credit utilization ratio.
Since credit score is impacted by your utilization ratio as well, it’s unwise to cancel a credit card if you still carry a balance.
If you’ve paid off some of your credit cards, but still carry a balance on others, consider cutting up your unused credit cards rather than closing the accounts.
You’ll avoid being tempted to use them again and, at the same time, you’ll maintain a high available credit limit.
Once you’ve paid off all your debt, you can then consider closing up credit cards you no longer have a use for.
Consider, however, that the age of your credit history has a big impact on your score.
There are plenty of people with credit scores above 740! That’s a great credit score to have and surely they didn’t get there by constantly getting into debt or closing up account after account as soon as they paid off the balance.
Closing up credit accounts won’t erase its history forever though.
According to experian, accounts with both positive and negative impact will stay on your credit report for several years, even after cancelling them.
High vs. low available credit
While the more available credit you have, the better for your credit history, sometimes this can be downright damaging.
Credit cards are useful, if you can use them wisely.
Some come with amazing rewards. Opening up a new credit card to benefit from them is not uncommon.
In some cases, it’s even beneficial, especially if the company offers cash back or travel rewards or anything you might actually benefit from!
Other times though, opening up a credit card for the rewards is tempting, but it can do more harm than good.
Having too much credit available is dangerous, especially for those of you who are tempted to spend more that you can afford.
Credit card balance payments
Paying the balance of your credit car in full each month won’t affect your credit score, but missed or late payments do!
Debt counts as much as 30% towards your credit score and payment history, 35%.
Late payments are reported to the credit bureau after 30 days.
This means, if you forget or aren’t able to pay within that time frame, your credit score will suffer.
To avoid having your credit score negatively affected by late payments, try putting them on autopilot.
And if that doesn’t work either, because you can’t afford to pay your balance in full each month, try keeping your credit card balance as low as possible.
Credit score is determined based on your length of credit and payment history, the amount of debt you owe, new credit and mix of credit cards & other accounts.
No doubt credit cards play a significant role in your credit score!
With that being said, the big juicy secret to maintaining a good credit score is simply knowing how to use your credit cards responsibly.
Keeping them active while avoiding debt is key to having your credit cards make a positive impact on your credit score.