Credit Cards and How They Affect Your Credit Score

There is a lot of hype about credit card rewards or low interest credit card that can entice you into purchases.  If you choose to use a credit card, it is important to understand how having a credit card and using it can help and hurt your financial life.  They come with a lot of benefits, one of which includes the opportunity to build credit for future purchases.

Your credit score

Applying for a new credit card may lower your credit score just slightly, if you are just applying for one credit card.  However, if you apply for multiple cards in a short amount of time, your credit score can drop significantly.  This is because the credit agencies see multiple credit requests as an indicator that you are in financial trouble.

Should I carry a balance on my card to help my credit score?

To build your credit, you need to actively use your card, and make payments in a timely manner, in order to create a positive credit history.  You want to have a historical record that shows your responsible use of credit cards.  Be careful with your purchases. Keep track of your daily usage of your card.  You don’t want to be surprised when the bill comes.  You can keep track of your spending by attaching a sticky note on the card and writing down every time you use it, or simply download the credit card app for that card onto your smart phone.  The app will give you the ability to track your spending and account balance easily and quickly.  You’ll be able to check your balance and transactions right before you are tempted to make a purchase, keeping your spending in check.  Carrying a balance can help you build credit, but if you are not planning on making a major purchase in the near future, avoid paying interest by paying your balance in full.

What if I decide to sign up with a different credit card company?

Should I cancel my old card?  Cancelling your unused or unwanted credit cards may not be the best way to help your credit because you want to keep your credit history with those credit card companies.  If it is a card you have never used, then perhaps cancel it.  However, if you have used the card before, keep your credit card history with that company by keeping the card open.  Simply put it in your safe or safety deposit box so it remains unused with a zero balance.  If you decide you still want to cancel the card, be aware that this may increase your “credit utilization ratio”

What is my Credit Utilization Ratio?

Your credit utilization ratio accounts for 30% of your credit score so you need to understand what factors influence it. The credit utilization ratio is the number of dollars you owe on your credit cards divided by your total credit card limit. This means that if you have two credit cards with a $10,000 limit each for a total of $20,000 limit and you have a $5,000 balance, your credit utilization ratio is .25.  If you cancel one of those cards, your credit utilization ratio increases to .5, meaning, you are using more of your available credit than you were before you cancelled your card.

What if I miss a payment on my credit card?

Missing a payment can cause a lot of stress, especially if you are shopping for a house or auto because you want to keep your credit score as high as possible.  The higher credit score you have, the better interest rate you will get on your loan.  This saves you a lot of money in the long run!  Missing a payment can affect your credit score, but only if you miss it by 30 days or more.  So as soon as you realize you’ve missed a payment, make it as soon as possible.  To assist you, set a calendar alarm on your phone or set up an auto payment for minimum payments so you’ll never be late.

Can I check my own credit score without affecting my credit?

Yes, checking your own credit score is considered a “soft pull” so you’re safe.  It won’t lower your score and you can check it as often as you like.  However, don’t apply for credit cards or loans unless you are serious because that is a “hard pull” and will affect your credit score.


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