Your FICO credit scores are a big deal. They affect everything from what interest rates you get on a loan to how much you pay for your cell phone plan.
Credit cards play a big role in establishing your credit score. If used wisely, credit cards can positively impact your credit. But, at the same time, credit card mistakes can be costly in the form of a damaged credit report.
Below, find out how credit cards affect your FICO scores and what you can do to establish and maintain good credit.
What is a FICO score?
The Fair Issac Corporation (FICO) is the company behind FICO credit scores. FICO scores are the most commonly used credit scores, used by credit card companies, auto loan lenders, and even mortgage lenders.
Lenders look at your credit score to figure out how responsible you are with credit to help them decide whether or not to issue you a loan or credit card. Your FICO score is a three-digit number ranging from 300 to 850. The higher the score, the better your credit.
Your FICO score is determined by the following factors:
- Payment history: Making all of your payments affects 35% of your credit score.
- Amounts owed: Your credit utilization, or how much of your credit you use, impacts 30% of your score.
- Length of credit history: How long you’ve had credit accounts open accounts for 15% of your score.
- New credit: The amount of new credit you have open determines 10% of your score.
- Credit mix: Your mix of credit, or how many different types of credit you have, such as credit cards and loans, affects 10% of your credit score.
5 ways credit cards affect your credit score
Credit cards can be immensely useful. They’re convenient and easy ways to pay for your purchases, and you can even earn rewards. However, it’s important to understand how credit cards affect your credit score and what you can do to build good credit habits.
Credit cards can impact your credit score in the following five ways:
1. Having a credit card can help you establish credit
When you’re just starting out, you may not have any credit at all, making it difficult to qualify for loans. Opening a credit card can help you establish a credit history and start building up your score.
If you don’t have enough of a credit history to qualify for a traditional credit card, consider applying for a secured credit card to get started.
2. Your credit card payment history can boost your credit score
Your payment history accounts for 35% of your credit score; it’s the single biggest determining factor. Making all of your payments on time can help build your credit. At the same time, missing a single credit card payment can hurt your score. To improve your credit score, sign up for automatic payments to minimize the risk of missing a payment.
3. Your credit card balance affects your credit utilization ratio
Your credit utilization ratio is a ratio that shows how much of your available credit you use. The higher your ratio, the lower your credit score. When you apply for a new credit card, you increase your available credit and lower your score, boosting your credit. You can maintain your good credit by keeping your card balances low.
4. Applying for a new card can dinge your credit
When you submit an application for a credit card, the company will perform a credit check. These credit inquiries can impact your credit. According to myFICO, each credit inquiry can reduce your score by as many as five points.
You can minimize the damage to your credit report by applying for new credit sparingly. Only apply for a new card when you actually need it.
5. How long you’ve had your credit card impacts your score
The longer you’ve had a credit card, the better it is for your credit score. Opening new accounts can damage your credit since they’re so fresh; new accounts make lenders nervous.
That’s why it’s a good idea to keep old credit cards open, even if you don’t use them often. Having a long credit history can have a positive impact on your score.
Improving your credit
Credit cards can be a great tool. If used strategically, you can use them to earn rewards and bonuses, finance major purchases, and even boost your credit score. To ensure you maintain good credit, make all of your payments on time and apply for new credit only occasionally.
Don’t know your credit score? You can check your credit score for free with Credit Soup.
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles. The information is accurate to the best of our knowledge when posted; however, all credit card information is presented without warranty. Please check the issuer’s website for the most current information.