How Do Credit Cards Affect Your Credit Score?

Point of Interest

How you use loans and credit cards determines your credit score. The credit score consists of a three-digit number, which identifies whether you’ll have access to credit in the future and how much interest you’ll pay to own a credit card or get a loan.

A credit score is a snapshot of your financial history as it relates to installment loans and credit cards. A company wanting to understand how likely you are to default on credit or a loan will use your score when deciding whether or not to approve your credit card or loan application.

Your credit score falls between 300 and 850 with a lower score indicating a higher risk of non-payment and default. Consumers with higher scores can receive larger credit limits and lower interest rates when seeking lines of credit or a loan.

Having a credit card and is one of the main ways to help boost your score, depending on how you handle the debt and whether you pay on time each month.

How are credit scores calculated?

FICO is a data analytics company using information from the three major credit bureaus, Equifax, TransUnion and Experian to determine your credit score. Each of these companies receives information from your creditors regarding your debt and payment activity. Consumers with higher credit scores typically have access to less expensive financing options. Those with low scores are more likely to pay high-interest rates and finance fees or be denied credit.

Credit score ranges vary from 300 to 850:

  • 800-850: Excellent
  • 740-799: Very good
  • 670-739: Good
  • 580-669: Fair
  • 300-579: Poor

Although the actual formulas used to calculate credit scores are secret, financial experts agree on the criteria which contribute to maintaining or boosting credit scores. The main factors that make up your credit score include:

  • Payment history: 35%
  • Credit utilization ratio: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Type of credit used: 10%

How credit cards affect your credit score

Proper credit card usage is crucial for the health of your credit score. Getting and using a credit card the right way could help you raise scores in just a few months.

Credit limit usage

Every credit card comes with a limit. Your credit utilization ratio, or the amount of your total available credit you carry over from month-to-month accounts for 30% of your credit score. You may have several credit cards with different limits, so to figure out your ratio, divide your total credit limit across all cards the total amount owed.

Let’s use an example. If you have four credit cards with limits of $350, $500, $750 and $1,200 and you owe a total of $1,457 across all of the cards, your credit utilization ratio is $1,457 divided by $2,800 ($350 + $500 + $750 + $1,200), which is about 52%. Ideally, your credit utilization ratio from month-to-month should be less than 30%

Developing good credit card habits, like paying your balance in full each month, is a smart way to control your credit card usage while protecting your credit scores.

Monthly payments

If you have numerous late credit card payments on your credit history, you may also have a low credit score. Fortunately, new information has more of an impact on your score than old information. If you aren’t already making every payment on time, it’s best to start now. Even if you are on a tight budget, set up automatic payments on your minimum amount due. If you prefer to pay more than the minimum amount due each month, you can go into the system and make additional payments or automatically pay the entire statement.

Applications and hard credit checks

When a credit card issuer extends credit to you by offering you a new account, the issuer may conduct a hard pull of your credit profile and credit scores. This type of credit inquiry can drop your credit score by a few points and too many hard credit inquiries could hurt your score significantly.

Credit card companies have to get your permission to conduct a hard pull of your credit. If you get notices about being pre-approved for credit, the company may have conducted a soft pull of your credit profile. This type of inquiry doesn’t require your permission and won’t hurt your scores.

Number of cards

The number of revolving credit accounts on your report could affect your scores. According to FICO, credit card users with scores over 800 had an average ofthree credit card accounts. Adding a new credit card account could help your score by improving your overall credit utilization ratio, so long as you don’t carry a balance on the card from month-to-month.

If you have more than three open credit card accounts, don’t immediately cancel any of those cards. Doing so will decrease your available credit and increase your credit utilization ratio. Accounts marked as inactive by the card issuer or those in collections won’t change your credit utilization ratio.

Credit history

The amount of time you’ve been using credit has some effect on your credit scores, as well. Leaving accounts open, even if you aren’t using them, is one way to maximize your credit history timeline.

Younger people may have a more difficult time establishing credit if they don’t have loans and credit cards early in life. Opening one credit card and paying off the balance each month is one way to help create a stable credit history.

Managing your credit cards

Organization is crucial when managing credit cards. If you want to boost your credit score, make sure you focus on your future credit card usage habits:

  • Set up automatic payments so you never miss a due date.
  • Ask your cardholder to change your due date so it aligns with your paychecks.
  • Reduce the outstanding balances on your current credit cards.
  • Ask each of the credit bureaus for a copy of your credit report so you can check for errors. Each of the three main credit reporting agencies must provide you with a copy of your credit reports once every 12 months. You can order all three reports at once or ask for them one at a time.
  • If you have a good payment history with a credit card company, ask them for a limit increase to boost your utilization ratio.
  • If you don’t currently have a credit card, research your options and target credit card companies with cards that are appropriate for your credit score.

The bottom line

Credit cards affect your credit score by helping you create a credit history showcasing responsible use. Keep your credit utilization ratio in mind when you make a new purchase, though. If possible, it’s best to pay off your cards every month. Not only will you minimize interest charges, but you’ll also gain access to less expensive credit sources as your scores rise over time.

Rachel Morey

Rachel Morey is a personal finance and credit card review writer with nearly a decade of experience. She’s written for a number of high-profile sites, and focuses on distilling complicated topics into easy to understand concepts with actionable tips for success.