Many factors go into determining your credit score, that magical, hard-earned number that identifies you to potential lenders as either high or low risk. More than half of that number comes down to how you use — or don’t use — your credit cards.
From applying for a new card to closing out an old one, everything having to do with a credit card — balance, payment history, credit limit, account status, date opened, even not having one — will influence your credit score. Without the benefit of a healthy credit card history, you may find it difficult to get approved for a mortgage, car loan, apartment or other transaction requiring a credit check.
The simple act of applying for a new card, for instance, can temporarily knock a few points off your credit score. Such “hard” inquiries, especially if made repeatedly, may suggest a borrower is desperate for cash, which is why it’s best to keep such applications to a minimum.
Keep in mind that opening a new credit card can lower the average age of your accounts. Length of credit history makes up about 15% of your credit score, so you may lose points if a new account drops your average too low.
On the other hand, adding a new line of credit can increase your credit mix. This is considered a net positive by lenders, since having more than one type of credit (e.g., auto or student loans plus credit cards) shows you’re capable of handling a diversity of credit.
Another benefit of a new credit card: lower credit utilization. Credit utilization is how much of your available credit you actually use. Less than 30% of your max is recommended (although under 10% is considered ideal for the best scores). So unless you use that new card to make big purchases or transfer large balances, your regular spending may translate into a smaller percentage of your increased credit limit.
It may seem counterintuitive, but canceling an old credit card can actually hurt your credit score because of how it affects your credit utilization. It reduces your available credit and, thus, your utilization rate. As mentioned, you want that credit-to-debt ratio to be as wide as possible.
As long as you’re not paying a high annual fee (or risking the temptation to overspend), it’s good to keep credit card accounts open for as long as possible. Along with the higher utilization rate, this also keeps the average age of your accounts from dropping. If you’re not using a card regularly, consider adding a small recurring payment (such as a streaming service or utility) to keep it active and part of your overall mix.
How you use — and pay off — your credit card is even more important. With payment history determining up to 35% of your credit score, it’s crucial to make timely payments, even if only the monthly minimum. Otherwise, a single late payment past 30 days can have a serious negative impact, one that could take months if not years to recover from. Consider setting up automatic bank payments if that becomes a concern.
Carrying large monthly balances can also paint you as a greater risk, even if you pay off your balance every month. One way to avoid this is to make payments just before your statement closing date since it’s that end balance that gets reported (whether you’ve paid it off or not).
A credit card can be a great financial tool with many benefits. But it’s important to understand how using it can both help and hurt your credit score.