Credit cards are a financial fact of life for many people, but have you ever stopped to think about how they might affect your credit? Although there are many purposes credit cards can serve — emergency funding, a way to pay bills without exposing your bank information, a chance to earn rewards — they also play a big role in your credit scores. Here are some important things you should know about how credit cards affect your credit.
How Credit Cards Affect Your Credit
The thing about credit is that you have to use credit to build it. Therefore, credit cards can affect your credit in a good way when used responsibly. Here’s what good credit card usage looks like:
- Never carrying a balance from month to month — instead paying the full statement balance by the due date
- Always paying your credit card bill on time, even if you can only pay the minimum
- Not constantly opening new credit cards to get discounts and rewards, instead applying for credit when you need it and choosing your credit cards carefully
- Keeping old credit cards open so you can show a long credit history — as long as you’re not worried about using them to the point where you won’t be able to pay them off each month
- Protecting your credit card by using unique passwords on online accounts and only shopping on secure websites
- Carefully reviewing your credit card statements each month to make sure you weren’t subject to any fraudulent charges
These steps can help you avoid falling into credit card debt, build positive credit behavior, and protect yourself from credit card theft. More specifically, here’s how these steps can help you build positive borrowing behavior:
- Payment history is the most influential factor in FICO® credit scores — so, making on-time payments can help you build and improve your credit
- The balance you carry on your credit cards greatly affects your credit scores — so the lower your balance, the better (more on this below)
- New credit is a less influential credit score factor, but opening too many credit accounts can do damage (each credit application takes a few points off your scores — no big deal every once in a while but not likely something you want to do regularly)
Credit Utilization is the Key
Payment history may top the list of credit score formulas for both FICO® and VantageScore®, but the game changer when it comes to credit cards can be your credit utilization. Having a high credit utilization can hurt your credit scores in a big way.
You can find out your credit utilization for each credit card by simply dividing your balance by the credit limit and multiplying the sum by 100. You can find out the utilization on all of your credit cards by doing the same formula, only this time adding up all of your balances and all of your credit limits.
Experts say it’s best to keep your total credit utilization below 30 percent — but there’s not a magic change that happens between 30 percent and 31 percent. Basically, the lower you can keep your utilization, the better — with zero being the best.
This can be complicated if your credit gets pulled mid-month before you had a chance to pay your bill. Typically, this shouldn’t be an issue unless you know you need good credit for a specific reason (such as right before applying for a loan). What you could do in that case is pay your balance off before it’s due to increase your chances of the lowest possible utilization when your credit gets pulled.
While on this topic, it’s important to know about a myth floating around the credit world that says you need to carry a balance from month to month to build credit. This couldn’t be further from the truth. Using credit is an effective of way building it, but you don’t need to fall into debt to do so. Again, when it comes to credit utilization, the lower your utilization, the better.
Credit Cards: Good for Your Credit When Good for Your Finances
This entire description of how credit cards affect your credit is based on an assumption of ideal credit card usage. The problem is, life doesn’t always work out in ideal ways.
If you fear opening credit cards is too slippery a slope to debt, then you can seek out other ways to build credit. In fact, if you have student loans or an auto loan, you’re already building credit. Loans you already have can help you build credit as long as you’re paying them on time and in full. Plus, there’s little danger of them leading to more debt since they’re not open-ended like credit cards are.
You can also build credit by getting added as an authorized user on someone else’s credit card. This only works if that person’s credit behavior is positive, but in that case, it can help you build credit without running a risk of debt for you. (You don’t even have to have a physical card if you’re an authorized user, so you can make sure you aren’t even tempted to use that account.)
In short, building credit is important, but so is listening to your instincts. You don’t have to use any financial product you’re wary of, and there are often more ways than one to achieve financial goals.
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