- Credit cards have an impact on your credit score whether you have one or not.
- Credit bureaus keep a close eye on your credit cards that make up your credit score.
- Your use of your credit card, its balance, payment history, credit limits and the date you opened your account are some of the factors that are taken into account when calculating your credit score.
- Although you have a limit on your credit card, it is never a good idea to max out your credit card.
- Repaying more than the minimum amount boosts your credit score.
It should be rather obvious that your credit score would be influenced by your credit card. It is one of the easiest methods for a person to accumulate debt and establish a credit score. However, you need to think very carefully about how you are going to use your credit card.
To have or not to have
If you think that not owning a credit card is good for your credit score, think again. You can only have a credit score if you have credit. It is the only way for creditors to see if you are responsible with your money.
Getting a credit card is one of the easiest ways for you to get a credit score. Once you start using it and accumulating debt, the credit bureaus can track your usage and give you a credit score.
Once you have your credit card, you’ll have a credit score, but you also need to manage your credit if you want your credit card to be beneficial for your credit score. If you manage your credit well, your score will also pick up.
Once you have your credit card, you will also be more likely to apply for other credit accounts and loans. This is beneficial for your credit score seeing that 10% of your score consists of a variety of credit accounts.
What makes the difference?
Having a credit card and not using it doesn’t build up a credit score. There is nothing for the credit bureaus to build a score on if the card is left dormant. Therefore, you have to use the credit card continually. However, how you use your card is essential for a good credit score.
There are many things that the bureaus look at when they calculate your score each month. Your credit card limit is the most obvious factor that is taken into account. Credit providers will allocate you a credit limit, based on your earning. It is calculated on the maximum installment that you can afford based on your salary.
This is a limit and not a target. It doesn’t reflect well when you max out your credit card. It sends the message that you are an irresponsible spender and cannot manage your finances. However, life happens and sometimes you have to max out your card.
How you repay your installments is the next factor that comes into play. The quicker you pay off your debt, the healthier your score will be.
Repaying your debt ahead of schedule shows the credit bureaus that you are responsible with your finances and that you are a low-risk candidate. It indicates that you are more likely to pay off your debts and you’ll likely get better interest rates as well.
Credit card applications
It’s kind of a paradox. You can’t have a credit score without credit, but just applying for a credit card can affect your credit score. Remember that your credit score is continually evaluated, so if you use your credit card wisely, you’ll build a good record in no time.
However, when you apply for more and more credit cards, the red light goes off, and your score takes a plunge.
Every time you apply for a credit card, it goes onto your record, whether you are approved for the card or not. If you apply for many credit cards in a short space of time, your score is even worse off.
It is best to keep your credit cards to a minimum and only apply for a new one if you really need it. Then again, the fact that you need a credit card could also be an indication of mismanagement of your finances.
