There are several ways that credit cards affect your credit score. This includes applying for a credit card, using it, and how diligently you repay the balance.
How Does a Credit Card Impact Your Credit Score?
Companies are keenly interested in your credit card activity and use it to determine your credit score. This is because you have more discretion when handling your credit cards as opposed to paying back a mortgage or student loan. This way, your credit cards paint a picture of the type of risk you pose to lenders.
So, does applying for a credit card hurt your credit? According to the experts at SoFi, “Applying for credit cards is not something you should take lightly because it can hurt your credit score. One credit card application can ding your score by just a few points, but multiple applications can raise red flags for lenders and drag down your credit score accordingly.”
When you open a credit card, it adds a hard inquiry into your credit file. Soft inquiries, for example, checking your credit score or getting prequalified for certain types of credit, will not affect your credit score. Hard inquiries from lenders that are deciding whether they will lend you money can negatively impact your credit score in the short term. A hard inquiry will stay in your credit report for two years. But its effect on your credit score will only last a few months.
Opening a new card can increase your maximum credit. Credit cards offer revolving credit, meaning that you can repeatedly borrow as long as you make your payments. Installment credit is like a lease or student loan. A convergence of installment credit and revolving credit can increase your credit limit.
How Using a Credit Card Can Affect Your Credit Score
How you use credit cards will significantly impact your credit score. If you make all of your payments on time every month, you will improve your credit score. Credit scoring models put more emphasis on payment history. It represents 35 percent of your FICO score. Even if you make the minimum payment due every month, it will help to improve your score with time. However, just one payment that is 30 days past the account due date can crush your credit score.
The best-case scenario is that you can pay off your credit card balance each month and avoid late charges. However, if you can’t do that, try to at least keep your credit utilization under 30 percent across all of your credit card accounts. If you max out your credit card, it damages your credit utilization, making keeping up with payments almost impossible, especially when you factor in interest charges.
Manage Your Credit Cards Well
Credit card management can have a massive impact on your credit score. You must monitor your credit report and score regularly. If there are any anomalies, address them promptly.