How do Credit Cards Affect Credit Scores?

Credit cards can affect your credit score in many ways, and if you are not careful, your credit score can decline easily and quickly. 

The first distinction to make in order to understand what affects your credit score is the difference between soft and hard inquiries. Soft inquiries are things that do not impact your credit score. For example, when you check on your score, this is a soft inquiry. A hard inquiry, on the other hand, does impact your credit score. One example of a hard inquiry is applying for a new credit card.

Hard inquiries include payment histories, opening a new credit account, debt-to-credit ratios, how long a cardholder has owned a line of credit, and the type of credit you engage in.

Payment histories

The most common mistake cardholders make is missing their payments. Not only will this result in interest charges compounding each day the balance is not paid in full, but it will also hurt the credit score of the cardholder. Although it is unrealistic to expect all cardholders to be able to make their monthly payments on time, in full each time, it is crucial for the cardholder to try and be as timely as possible with the fees they are charged.

Banks are the least lenient with this indiscretion and are quick to report it to credit scoring bureaus. The most important thing a cardholder can do is minimize, or eliminate completely, the number of late payments they make.

Opening a new credit line

Applying for a credit card will result in a decrease in your credit score. As a form of a hard inquiry, this will stay on your report for up to two years, but only affect your score for several months. Additionally, opening a new credit card will decrease the average age of your account, which also has a negative impact on your credit score.

However, opening a new credit account will increase your credit limit and therefore lower your credit utilization rate, resulting in a higher credit score. Having a credit utilization rate of under 30% is where cardholders should aim to be, but the lower the better.

Since there are two opposing impacts on your credit that come from applying for a new credit card, it is important to know that opening a new card will help more than it will hurt. Owning too many credit cards will have a negative impact on your score since it becomes extremely difficult to manage payments, and also makes the cardholder seem less trustworthy to the bank in terms of loans. Therefore, buying a new credit card can help the cardholder if they use it correctly, but be careful to not own too many cards or miss payments.

Debt to credit ratio

The debt to credit ratio is the credit utilization rate. As mentioned previously, opening a new account can help to reduce this value. It is necessary for cardholders to keep this rate under 30%, otherwise, it can dramatically hurt their credit score.

The average age of your account

Opening a new account will hurt your average age of account, as will closing an account. The longer you own a line of credit, the more trustworthy to banks you seem. This is only true, though, if you make all of your payments in a timely manner. Many people do not give this aspect serious consideration, but it is another way your credit score can be affected negatively if you open or close too many lines of credit.

Type of credit

Bureaus love when cardholders engage in various different credit transactions. This is referred to as a credit mix. Owning a credit card is revolving credit, which is very common for most people. However, there is also installment credit, which can be used for personal or auto loans. Engaging in both of these types of credit successfully will boost the credit score of the cardholder.