Credit Cards and Your Credit Score

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Car loans and mortgages play a big role in your credit score, but how you manage your credit card debt is often scrutinized more by lenders. Lenders know that how we manage credit card debt is a good indicator of overall financial responsibility.

How do credit cards play a role in your credit score? This and other frequently asked questions are answered here to help you better understand how the plastic in your wallet could impact your ability to get a car loan or a home mortgage.

Do I Need a Credit Card to Improve My Credit Score?

When you first enter the adult fiscal world, you have no credit score. This makes it difficult to get a car loan, buy or rent a house, and so much more. Lenders don’t have anything on which to base their decision. A credit card helps to start your credit file and build a credit score.

If you are in college, many institutions offer cards to students. This is a great way to get started but should be approached with caution. The interest rates are usually not the best, and it is easy to quickly become overwhelmed with debt.

The best way to get a credit card and start your score is through a prepaid card. These cards have a credit line based on the amount you deposit with the credit card company. Then, as you use the credit and make payments, the company reports to the three credit bureaus, and your score is born. Most prepaid cards will offer you an unsecured card after some time and responsible credit use.

Department store credit cards are another way to get credit started. These cards are credit lines that are only good in the store that gives you credit. These credit lines are normally not as hard to get as major credit cards and are reported to the credit bureaus. While these cards are good at helping start your credit file, you should still get a major credit card at some point for building your score higher.

How Do Credit Cards Affect Your Credit Score?

From the time you apply for your first card to the day you close your accounts, credit cards will affect your credit score in several ways.

  • First, when you apply for a credit card, the bank or credit institution that offers the card inquires on your credit file. This is called a hard credit pull. They need the information to determine your approval. However, this hard pull costs you points on your score. If you apply for multiple credit cards, you can reduce your score by up to five points per application.Why? Lenders see multiple applications for credit as a sign of financial instability. One application doesn’t look bad; more than one looks like you are credit shopping.
  • Plastic credit can have a positive or negative effect on your payment history. Payment history is the number one factor that determines your FICO score. If you pay your credit card bills on time, your score will reflect it; however, if you are negligent and pay them when you can, your score will go down.
  • Credit cards add to your credit mix. Having a balanced mix of credit can be a sign of your financial responsibility. It shows you can manage your money and credit wisely. If your credit mix is unbalanced, it can be seen negatively by potential lenders.
  • Having credit card accounts adds to the amount of credit you have available overall when lenders look at your credit score; however, if you carry high balances, it also shows that you have high credit utilization, not a good sign to potential lenders. Your credit utilization is the second most important piece of your FICO score.
  • When you apply for a new credit card and get it, you lower your credit history’s average age, a factor in your overall score. If you don’t need a new credit card, don’t apply for one.

As you can see, how you handle the plastic in your wallet can greatly impact your ability to get loans from banks and other financial institutions.

Will a Credit Card Application Hurt My Credit Score?

No, one credit card application will not hurt your credit score in a major way. It may ding it for a few points. Those will shortly be recouped as you pay your bills on time. But, the inquiry into your credit score stays on your credit file for two years. If you apply for multiple cards, these inquiries add up and make you appear reckless.

For example, it’s not uncommon for credit card companies to send out zero percent credit offers. You have a high balance card and think it might be a good idea to transfer to a better interest rate. But, in a few months, the new rate increases, and another offer arrives in the mail, and you transfer again. These add up, and your score goes down. Lenders see this as poor fiscal management and are unwilling to take the risk of extending you more credit.

Many people who get in financial trouble think that a credit card is an answer; then, when they are denied credit by one company, they apply with another company. Again, each application hurts their score, and eventually, no lender will give them a second glance.

The bottom line here is you should only apply for credit when it is necessary. Those offers for discount prices when you pay by credit are misleading. You wind up paying more for the credit extended than you saved by using credit.

Don’t apply for every offer that comes your way, and don’t try to get plastic when you are in financial trouble; you simply make it harder to get credit when you need it.

How Many Credit Cards Should I Have?

There is no hard and fast answer to how many credit cards are good or bad for your credit. You have to take into consideration:

  • Credit Utilization: If you keep your utilization rate below 30 percent, your credit score won’t be affected.
  • Length of Credit: Every time you open a new credit account, your average length of credit goes down. This is a negative factor in your score’s computation.
  • A Mix of Credit: Your mix of credit needs to be balanced. Lenders who see ten credit cards and only one installment loan may be hesitant to approve a loan.

The bottom line, keep the number of cards you have to a minimum and keep the balance owed on each one low.

Is It Better to Pay off Your Credit Card or Keep a Balance?

When you can, it is always better to pay your credit card balance completely. Why? Your balance affects your credit utilization. There is a common myth that you should keep a small balance on your cards to help your credit. This is not true. First, you pay interest on the balance. If you have the ability to pay your card in full, why would you carry a balance and pay the credit card company more money than necessary?

If you leave a very small balance and don’t use the card, you may forget to make the payment. It doesn’t matter if the balance is $20 or $100. If you miss a payment on the account, your credit score will take a big hit. Payment history is the number one factor in determining your FICO.

Second, the balance, no matter how large or small, becomes part of your credit utilization. This is the ratio of your overall credit available to the amount of credit used. For example, you have a total of $5,000 in overall credit lines, and you owe $4,000 of this amount. Your credit utilization is very high.

Lenders look at credit utilization as your ability to manage money wisely. Your house and car loans are set payments; however, your monthly credit card bill is determined by how much of your credit you use. So, you control your utilization. Credit utilization is the second most important factor in determining your FICO score. Keep it low, and your score will reflect your responsibility.

There is an exception to paying your balance off monthly. If you don’t use your credit often, there is no activity on the account. The scoring models used to calculate your FICO and Vantage score both see the recent activity as favorable. If you have a card that you use for emergencies, it can be beneficial to set one of your regular monthly bills up to be paid with the card and then pay it off as soon as your credit statement arrives. You keep the account active and paid in full.

Does Closing a Credit Card Hurt Your Credit Score?

The easy answer is yes. It can hurt your credit score in several ways. First, it affects your credit utilization. If you cancel the card, you remove that credit line from your overall amount of credit available.

From the previous example, your $5,000 credit line is now $4,000, but the amount you owe of this could still be $4,000 if the card you canceled had zero balance. This increases your credit utilization tremendously.

Next, your credit score is also based on your length of credit. This is the amount of time you have had each account. So, if the account you closed was your oldest account, you have reduced the length of credit on your file.

If you cannot trust yourself not to use your plastic, put it in the freezer or cut it up, but don’t close the account. Even though recent activity is part of the scoring model, it is better to have an open account providing a length of credit and available credit to your utilization even if you lose in the recent activity area.

There’s always an exception, and this is true of closing accounts. Closed accounts stay on your file for ten years. If you pay an annual fee to have an account that you don’t use, it may be worth losing the credit utilization and length of credit to save that money. Potential lenders will see the payment history and other data about the account even if it isn’t used to compute your score. On the other hand, you may be able to ask your credit card company to transfer your card to one with no annual fee. This keeps the account open on your report, helping your credit length, and it helps your credit utilization even if you don’t use it.

Does Being an Authorized User Help Your Credit Score?

The answer depends on the situation. If you are young and have no credit file, yes, it can help. However, if you have bad credit and are trying to rebuild credit, no, it does not have an effect on your score. Being an authorized user does not make you responsible for paying the credit account. It simply authorizes you to use the account.

Even as a tool to help establish credit, an authorized user’s amount of impact is not huge. If you need to establish credit, a secure credit card is better than being an authorized user.

If you need help rebuilding your credit, a joint account is better than being an authorized user on an account. Because both account owners are responsible for the credit used, the models give both owners scores for the account activity, payment history, utilization, and other factors.


Your credit score depends on many different factors and types of credit in your file. Revolving credit, typically in the form of credit cards, often has a big impact on your score and how lenders view your responsibility. Installment credit doesn’t require input from you; you simply pay your bill on time. Use credit cards wisely and keep your score healthy; it stays with you for your financial life.

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