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Credit Card Basics

How Do Credit Cards Affect Your Credit Score?

Through April 20, 2021, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

Credit cards can affect your credit score in several ways. From the application itself to your usage habits, payment history and beyond, they play a significant role in how your credit scores are calculated.

How Opening a Credit Card Can Impact Your Credit Score

Credit scoring models take a close look at credit card activity when determining your credit score. Because you have more discretion with how you manage credit cards than you do with other types of credit, such as a student loan or mortgage, how you handle credit card accounts helps scoring models measure what type of risk you pose to lenders.

Credit cards can impact your credit score from the moment you apply for a card. Here are a few ways opening a credit card can affect your credit score.

1. It adds hard inquiries to your credit file.

Lenders will inquire about your credit to determine what risk you pose as a borrower. There are two types of inquiries into your credit files, and each affects your credit differently.

Soft inquiries don't have an impact on your credit score. Examples of soft inquiries include when you check your credit and when you are prequalified for special offers from credit issuers.

Hard inquiries are different. Lenders perform hard inquiries when they are considering whether or not to lend you money, and this can negatively affect your credit score in the short term. Applying for a new credit card will result in a hard inquiry in your credit file, which could lower your score by a few points. While a hard inquiry will remain on your report for two years, it will only affect your credit score for a few months.

2. It may increase your credit mix.

Even if you don't yet have a credit card, you may have other forms of credit, such as a personal loan or auto loan. These are installment loans: You borrow a set amount, pay it off in monthly installments, and once paid, the account is closed.

Credit cards, on the other hand, are considered revolving credit. Revolving credit allows you to borrow over and over up to a set limit as long as you make at least a minimum payment (determined by the card issuer) every month. Any unpaid balance rolls over, or revolves, monthly. Interest will be charged on whatever balance remains unpaid.

If you only hold installment credit, getting a credit card will increase the types of credit you maintain, known as your credit mix. Having both installment and revolving credit shows lenders you can manage different types of credit accounts (assuming you make all your payments as agreed). This can help your credit score, as credit mix accounts for 10% of your FICO® Score* , the scoring model most commonly used by lenders.

3. It hurts your average age of accounts—but may help your credit utilization.

Generally, the longer you've held credit accounts, the more it will help your credit score. This is especially the case if you've kept your accounts active, always made your payments on time and never missed a payment.

When you open a new credit card, you'll bring down the average age of your credit accounts. Credit scoring models look at this average age when calculating credit scores. As part of the length of your credit history, which makes up 15% of your FICO® Score, the average age of your accounts could hurt your credit score if it decreases.

Closing a credit card account could have a much bigger effect on length of credit than opening one, however. More on that below.

On the positive side, opening a new credit card account adds to your total credit limit, which can help lower your credit utilization rate, or percentage of total revolving credit you're using relative to your total credit limit. Credit utilization is the second most important factor in your FICO® Score calculation behind payment history.

Experts recommend keeping your credit utilization under 30% to help maintain a good credit score, but the lower, the better. So, for example, if your total available credit across all your credit cards is $9,000, keep your total amount owed on those accounts under $3,000. For top credit scores, utilization should be under 7%.

Opening a new credit card instantly adds to the amount of credit available to you, which can give your credit score a bump. More important, though, is what happens once you start using your new credit card.

How Using Your Credit Card Can Affect Your Score

How you use and manage your credit card accounts has a significant effect on your credit score. From how much you spend on your card to how you handle payments, you can do much to help—or hurt—your credit.

Making all your credit card payments on time every month will go a long way toward helping improve your credit score. Credit scoring models weigh payment history more heavily than any other scoring factor—it accounts for 35% of your FICO® Score. Making at least the minimum payment by the due date every month on your credit cards will help your credit score over time. But even one late payment made more than 30 days past the account's due date can have a serious negative impact on your credit score.

To make sure you never miss a payment, set up autopay on your credit card accounts and have enough money in your checking account to cover the payment every month.

While it's ideal to pay off your credit card balance each month to avoid interest charges, that might not always be possible. If you can't pay off your card each month, try to at least keep your credit utilization rate under 30% across your credit card accounts. Maxing out your credit cards not only hurts your credit utilization, but can make keeping up with payments difficult, especially with interest charges adding up.

How Closing a Credit Card Can Hurt Your Credit

When you close a credit card account, you instantly reduce the amount of credit available to you. This can negatively impact your credit score because it will likely increase your credit utilization rate.

That's why it's usually best to keep credit card accounts open, even ones you haven't used in a while. By leaving accounts open, you increase the amount of available credit you have in relation to the debt you owe. Consider adding a small recurring monthly payment, such as a streaming service or gym membership payment, to a card you haven't used in a while to keep the account active.

Keep in mind that while it's usually best to keep credit card accounts open, if you are paying high annual fees for cards you're not using or are finding it too hard to resist using a card that's burning a hole in your wallet, your credit score won't necessarily take a big hit if you close an account. If you pay off your balances every month (keeping your credit utilization low) and have other cards with a long credit history, the effect may be minimal. Also, if you've paid your bill on time every month, your closed account can remain on your credit report for 10 years, so it will be a while before the closed account affects your length of credit history.

The Bottom Line

Credit cards—especially how you manage them—can have a significant impact on your credit score. To get a better picture of how credit cards may be affecting your credit, monitor your credit reports and credit scores regularly. You can get a free credit report from each of the major credit bureaus (Experian, TransUnion and Equifax) once every 12 months at AnnualCreditReport.com. You can also get a free Experian credit report and FICO® Score to make sure you're on the right track or find out where you might be able to improve.

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