How Do Credit Cards Affect Your Credit Score?

Your credit score is a continuous measure of your daily credit activities; it never remains constant. And no other form of credit generates as many activities as your credit card. So, in essence, it can have the biggest impact on your credit score at any given moment, more so than an auto loan or even a mortgage. It is important, therefore, to know just how your credit cards affect your credit score and manage your credit cards with care.

Payment history: The biggest score factor is your payment history, and although this consists of all your credit payments from all of your debt, your credit card payments are the biggest variable. If you carry multiple credit cards, they can be the most difficult to manage from month to month. Credit card companies are the least forgiving for late payments and are trigger-happy to report a payment that is one day late.

Debt-to-credit limit ratio: Unlike fixed loans, such as auto loans, installment loans, or mortgages, credit cards are revolving debts, meaning your available credit varies with your usage of them. If you overuse your credit cards and your debt-to-limit ratio increases, it indicates to the credit bureaus that you are relying too heavily on credit, which will hurt your score. When your ratio exceeds 25% to 30%, it can drag down your score.

The number of credit accounts: Ironically, too few credit card accounts can also hurt your score. If you carry just one credit card, you are more likely to run up the debt-to-limit ratio at some point. The credit bureaus also want to see how you manage credit across multiple accounts. Adding a credit account will likely hurt your score temporarily, but with use (and a solid payment history), the additional credit card will help you build your score. Closing a credit card account can also hurt your score by decreasing your available credit.

Putting your credit cards on ice: Some people believe that if they stop using their credit cards, their credit scores will improve. The reality is that non-use can actually hurt your score. Remember, your credit score is constantly changing, and your score could slip unless the credit bureaus have something to gauge your credit management. It’s essential to show a constant history of on-time payments and responsible use of credit by keeping your debt-to-limit ratio below 25%. This is especially important if you are trying to rebuild your credit. Just make sure you don’t spend outside your budget so you can pay your balance in full each month.