Credit score consists of multiple components including your payment history, length of your credit history, new card applications, debts and more. Credit cards and the way you manage your cards have a direct impact on the factors that make up your credit score. New applications, maxing out your cards, missing your dues or an unauthorized transaction made on your card- everything has the potential to improve or ruin your score. Here are few ways how your credit card affects your credit score.
Having a Credit Card
One of the easiest ways to build credit is to get a credit card. For those who are new to credit, it is difficult to avail high-ticket credit products like car loan, home loan or even personal loan. Lenders prefer to give loans and credit cards to people who have a good credit score. Hence, to start building a good credit profile, credit cards are one of the easiest types of credit that you can get approved for.
Credit Card Payments
The balances you carry on your credit card make up a major portion of your credit score. Hence, making timely payments is important to build a good credit history. For instance, if you pay the minimum amount due (MAD) and roll over the remaining balance to the next month, it is not considered as a late payment. Therefore, this will not affect your credit score.
However, if you miss paying even the MAD before or on the due date, a late payment will be reported to the credit bureaus, which can lower your credit score. Your credit report will show the number of days by which your payment was late under the DPD (Days Past Due) section. This factor, possibly, has the highest contribution in the calculation of your credit score. Therefore, on-time credit card payments can boost your credit score and help you build a good credit history whereas missed or late payments can ruin your score.
Credit Utilization Ratio
Every credit card has a preset credit limit, which is the maximum credit that you can use with the given credit card. The credit limit is assigned to you after analyzing your financial capacity. At any given point of time, you should not exhaust the entire credit limit available to you, as it increases your credit utilization ratio (CUR). A higher CUR makes you look credit hungry and lowers your credit score. Not only this, but many card issuers also report a “high balance”, which is the highest balance ever charged on your credit card. So, even if you utilize your total credit and pay it off, your credit report can still show that high balance. Therefore, you should try to keep your CUR as low as possible to build a good credit history.
Credit Card Applications
Your credit report has a record of all the credit card applications. Every time you apply for a credit card, the issuer requests the credit bureau for your credit report, which is known as ‘hard enquiry’. An occasional hard enquiry does not harm, but multiple hard enquiries within a short span can significantly reduce your credit score. Your credit score does not factor in whether you get approved for a credit card or not, but making multiple applications in a short span of time can put your credit score at risk. Therefore, it is best to keep your credit card applications to a minimum in order to maintain a good credit history.
Also Read: Could A New Credit Card Help Fix Your Credit Score?
Having Multiple Credit Cards
There is no rule regarding the number of credit cards you should own. Most of the people have 2-3 credit cards depending on the requirements. However, if you are finding it difficult to manage multiple cards, you should try to close some card accounts or avoid applying for new cards, as missed payments on even one of the cards can hurt your credit score. This is why you should get only as many cards as you can manage.
In the end, it is important to remember that your credit score does not solely depend on your credit card usage. The score is calculated after considering other borrowings, such as active loan accounts. It is important to make timely payments no matter what credit product you have in order to maintain a good credit score.