Are credit cards good for your credit score?
If you are viewing credit cards as all fun and games with little impact on your future financial future, you may want to rethink your idea. Credit cards allow for greater flexible spending, but that comes with the price of responsibility and financial planning. It is important to not only track your spending, but also remain conscious that the amount you are spending is something you can afford to payback within a reasonable time. These factors will have either a positive or negative impact on your credit score.
What is a credit score?
A credit score is somewhat like a rating for how financially reliable you are. Your credit score highlights the likelihood of whether you will pay back any money that you are loaned. This score is created, recorded, and reported by companies called credit bureaus. Every month, these companies analyse your credit card consumption. The evaluation includes the limit of your card, your payment history, your current card balance, account status, etc. Applying for a credit card, the amount that you use it, and the number of payments you make will all have an effect on your credit score. With that in mind, if you make payments on time and consistently use your credit card responsibly your credit score will increase. Alternately, if you do not use your card, miss payments, or continuously max out your account, your credit score will be affected negatively.
Why do you want a good credit score?
Your credit score will be viewed and taken into consideration for many life events that have any financial connections. For example, applying for a loan, getting a mortgage, submitting a renters application, buying a car. Companies will want to know how financial responsible you are.
Below I have gone more in depth with how your credit cards and credit score interact.
Balance information and Credit Limit
A credit cards current credit limit is the maximum amount that can be charged to the card at the respective time. Most credit cards have a limit and the amount of the limit is what is permitted to you. Generally, you always want to have some credit available – you do not want to continuously max out your card. Maxing out your card will give the appearance that you are “a risky borrower” who spends to the very ends of their means without any credit to fall back on. Overtime, most credit companies will increase your credit limit as your credit score increases because you have proved to be a reliable borrower with the funds to support your spending. As a general rule of thumb, it is recommended to stay within 30% of your credit limit.
The Monthly Payments of your Credit Card
Your credit score is not solely based on your last credit card payment. Your payment is factored into the outcome of your credit score, but it is not the sole determiner. The amount you pay, the time of payment, and month to month consistency are all contributing factors.
- Amount Paid: the larger payment you make towards the balance of your credit card, the greater positive impact will be made on your credit score
- Time of payment: It is highly important that you keep track of monthly pay cycle due dates. Making a late payment will result in a late fee as well as a negative representation on your credit score. There is no harm in paying early!
Number of Credit Card Applications
Credit cards are one of the easiest ways to uplift your credit score. The same can be said for decreasing your credit score if it is not used responsibly.. While having multiple active credit cards, and staying current on payments, is positive – Applying for too many in a short span of time could be harmful. Every time a credit card application is filled out the record is sent to your respective credit report. Opening several new accounts all at once does not give you the opportunity to prove you are able to keep up with them all. Spread out your applications and account activation overtime and use each account properly before opening another!
Number of Credit Cards you Own
This is the tricky part. While having multiple credit cards and being able to stay current with them proves you are a responsible borrower, you also do not want to have too many. Having a wallet full of credit credit cards gives the prevention that you are not financially stable enough to support yourself without the help from multiple credit companies. The right number of credit cards will differ depending on each individuals financial situation, but when making the decision for yourself shoot for that shows you are a responsible borrower who also does not solely rely on credit companies to finance majority of their spending.
The Length of Time your Credit Cards are Open
Credit cards get better with age! The longer you have a credit card the more beneficial it will be towards your credit score. Staying current and active on cards overtime creates a good impression of you and will eventually prove fruitful for your credit score. Do not get rid of your oldest credit cards; they are gold. Use them from time to time so that they remain active. Keeping a good credit score means that you have what it takes to qualify for an even better credit card – one with better rewards and terms.
These are some of the essential factors you need to take care of to have a good credit score. Credit cards are good for your credit score if you use them Properly. If you use it well, there is no way that your credit score will be negatively affected by your credit card. Just keep a decent number of credit cards and keep them open and active. Use them each from time to time and pay before the due date is close. Moreover, keep it in good standing with minimum to low balances, and you are good to go.