How a Credit Card Affects Your Credit Score
Those shiny pieces of plastic can be the best thing in the world, or the worst, depending on your point of view. Use them without discipline, and you will very quickly find yourself in debt. Use them wisely, avoiding impulse buys and paying off your bills very month, and they are the greatest and most convenient things in the world. Even better, they will prove to the credit bureaus that you are a financially responsible person, and your credit score will go up and up. Let's see how this happens.
Credit Cards are a Window into Your Financial Life
Most credit reports begin life with a credit card. Whether you are a student or your bank introduced you to the wonderful world of credit, that very first application has been marked and compiled in a computer. Every month, another record will go on your new credit report, showing if you paid your bill on time, and how much you paid off. As you go through life, car loans, mortgages, bankruptcies and other financial and social information will be added to your report, newer items affecting your score more than older items.
Many financial actions comprise your credit score your total debt load as a percentage of your total credit limit, the age of your credit history, the frequency you apply for new credit, and how well you pay your bills off. As you can see, credit cards can be a factor in all of these actions.
What a Credit Score is Made Of
- Total debt load (about 30% of your score) Having lots of debt will not necessarily lower your credit score. It's how much debt your have and how much credit you have available. For instance, if you have two thousand dollars on your credit card, it could look bad. However, if you have a ten thousand dollar limit, that's only 20% - a very healthy ratio. Credit lines and mortgages versus the value of your house are also taken into account.
- The age of your credit report (about 15%) Lenders need to know how well you respond to paying your bills. In order to do that, they need to see how you have behaved in the past. Because credit cards will likely be your first introduction to credit, paying your bills on time, and consistently, will be a good indication of your reliability to handle money well.
- Applying for new credit (about 10%) It stands to reason that the more lines of credit you have, the lower your score will be. This is simply because you are carrying more debt. However, even if you are not approved, this application still counts. Applying for credit too often could be an indicator of financial irresponsibility, such as applying for too many credit cards in too short a time, or hopping from card to card.
- Paying your bills (about 35%) The largest factor in your credit score is, of course, paying your bills. Skipping payments, only paying the minimum (thus carrying a higher debt load), or walking away from loans will immediately destroy your score. Conversely, paying on time, in a predictable and consistence manner, will prove to future lenders that you are financially trustworthy. Credit cards, or course, are a huge factor in this. Pay on time, as much as possible, and your score will be excellent.
Okay, I Pay My Bills on Time, But My Score is Still Low!
If you are concerned with getting a better credit rating, there are a few factors to investigate. If you rule out past bad debt such as defaulted loans or a high debt load, take a look at how your credit card activity is reported. First, make sure your credit card company is actually stating your credit limit. If they are not, then your credit report will calculate your credit limit to be the highest amount you ever placed on your card. This will make it appear your debt load is too high, and your score will suffer.
Another option is that you may have cancelled one of your credit cards. As strange as this seems, this could have actually hurt your score! Why? Two things if that card had a long credit history, this source is now gone. The second thing is that your overall credit limit is now lower. The credit bureaus calculate the credit limit of all your cards together, so removing one will remove that extra credit.
Instead, if you are trying to get your finances under control, cancel your store credit cards (they aren't worth as much), and take one of your major cards out of your wallet and keep it in a safe place. Use it once or twice a month just to keep it active.
Article by CreditToTheWise
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