How Credit Cards Impact Your Credit Score
Credit cards are a double-edged sword when it comes to attaining a high credit score. The way you use your cards will determine whether your score increases dramatically or drops drastically. Credit cards carry the most weight than any other type of debt as far as credit scores are concerned because they clearly show how you borrow and manage your debts. You choose how much to charge and pay each month— this free will is not offered with other kinds of debt. Although each credit scoring system uses a unique model, the following credit card habits can impact your credit score negatively or positively. Generally, having a credit card will help your credit score. The credit scoring systems need to see how you handle different kinds of debt.
This helps them find a mix of revolving debt and installment debt. Your credit mix makes up 10% of the FICO score. If you do not own a credit card, you can still prove that you are responsible and boost your credit score if you have other loans like car notes and mortgages. However, if you desire to have a very high credit score (close to the perfect 850 score), you will need a good reward card that is within your means then make use of it responsibly. Anytime you apply for credit, the card issuer will run a credit check. A higher credit score means that you are likely to pay your bills responsibly and so your new card will have a lower interest rate. Many credit inquiries in a short time will drop your credit score because according to research, someone looking for credit has higher chances of falling into financial problems than someone who is not.
Creating new credit accounts can cause your credit score to drop temporarily but a difference could come if you try making a huge purchase (like a house or a car) in the same period. On the other hand, creating new credit accounts might have a negative effect. One of the factors that affect your score is your debt amount relative to your credit amount; this is known as the credit utilization ratio). The lower the credit utilization rate the better. After paying off your credit card debt, you will probably choose to close the credit card accounts that you do not use anymore. However, that may hurt your credit. It may increase your credit utilization ratio because then, your available credit will be less.
Put the card away instead, or just cut it if you do not trust yourself. Credit cards are amazing, but they can seriously harm your score if you overuse the credit available to you. Your debt makes up 30% of your FICO score. It hugely influences VantageScore as well. Either pay all the credit balances each month or keep the balances very low. Paying your bills late is a very damaging habit. Payment history accounts for 35% of the FICO score and greatly influences your VantageScore. Multiple credit cards might increase your credit score which in turn leads to benefits like access to loans, among others.
Multiple credit cards can also be risky. All your credit accounts (student loans, mortgages, auto loans, store revolving accounts, and credit cards) account for 10% of your score. Whether you have one or ten credit cards, what really matters is how you use the card and whether you pay your bills before they are due. On average, Americans own three to four credit cards. There exists a correlation between more credit cards (seven) and a higher credit score (800+) according to Credit Karma. According to Mint’s credit reporting tool, “0-5 credit accounts is poor, 6-12 is not bad, 13-21 is good, and 22 or more (open or closed) is excellent”.
This is for all credit types and it accounts for just a small part of your credit score. Multiple cards might have a negative effect, but your credit score will not depreciate because you own several cards. Just make sure you are not opening and closing so many cards at the same time. The number of credit cards impacts some of the most crucial factors are total debt owed in relation to your credit limit. A new credit card increases the total credit limit. Alternatively, you can ask your credit issuer to raise your limit instead of getting a new one.
This is better than getting a new card because you will have only one card to manage and you will avoid the negative effect of a credit inquiry. However, one inquiry takes less than five points so if your credit score is excellent and credit history is long, new accounts may not have much of an impact. Another factor is the percentage of debt carried on each credit card. So that is why you should have no less than three credit cards. If you spend more than 20% of your limit per month, spreading the balance will help your credit score.
People get credit cards for convenience as well as the rewards. Chasing the rewards, however, may not be worth it. You can use one card that offers travel points and another one that offers high cash back for groceries and gas. Different types of cards have diverse reward programs. Here are the disadvantages to having multiple credit cards. Opening too many new credit cards will impact your credit history and consequently, your score. Some cards are not easy to maintain. With more cards and a high credit limit, you may spend too much.
