Your credit score is a critical part of your financial health. It affects your ability to get loans, rent an apartment, and sometimes even secure a job. Credit cards play a significant role in shaping your credit score, and how you use them can either boost or harm your credit. However, many myths about credit cards and credit scores create confusion and lead to poor financial decisions. In this article, we’ll dive into the facts about how credit cards affect your credit score and debunk some of the most common myths.
1. How Credit Cards Impact Your Credit Score
Credit scores are calculated using five key factors, and credit cards directly influence several of them. Let’s break down the major ways credit cards affect your score:
Payment History (35% of Your Score)
Your payment history is the most important factor in your credit score. It reflects whether you pay your bills on time. Making regular, on-time payments on your credit card helps boost your score, while missed or late payments can severely hurt it.
Credit Utilization (30% of Your Score)
Credit utilization refers to how much of your available credit you are using. Ideally, you should keep your credit utilization below 30%—meaning if you have a credit limit of $10,000, your outstanding balances should not exceed $3,000. A high utilization rate can drag down your score, even if you pay your bills on time.
Length of Credit History (15% of Your Score)
The longer your credit accounts have been open, the better for your credit score. This means that older credit cards can positively impact your score, even if you don’t use them often. Closing old accounts may shorten the average age of your credit history, which could negatively affect your score.
New Credit (10% of Your Score)
Each time you apply for a new credit card, it results in a hard inquiry on your credit report. While one or two hard inquiries may only have a minor impact, applying for too many new accounts in a short period can lower your score temporarily.
Credit Mix (10% of Your Score)
Lenders like to see that you can manage different types of credit, such as credit cards, personal loans, and mortgages. Having a mix of credit types can help your score, but it’s less important than factors like payment history and credit utilization.
2. Myth: Carrying a Balance Improves Your Credit Score
Fact: One of the most persistent myths is that carrying a balance on your credit card improves your credit score. In reality, carrying a balance does not help your score—it simply increases the amount of interest you pay. What matters most is making your payments on time.
While having some balance on your card is not harmful as long as it’s manageable, carrying high balances relative to your credit limit can hurt your credit utilization ratio, which lowers your score. To avoid this, try to pay off your balance in full each month.
3. Myth: Closing a Credit Card Always Boosts Your Score
Fact: Closing a credit card does not necessarily improve your credit score and can sometimes hurt it. When you close a credit card, you reduce your total available credit, which increases your credit utilization ratio if you carry balances on other cards.
Additionally, closing an older card can shorten the average age of your credit accounts, which is an important factor in determining your score. If you don’t need a card, consider keeping it open and using it for small purchases every few months to keep it active.
4. Myth: Applying for Multiple Credit Cards Hurts Your Score Long-Term
Fact: While applying for multiple credit cards can temporarily lower your score due to hard inquiries, the long-term impact is minimal if you manage the new cards responsibly. Hard inquiries typically lower your score by a few points, and their effect fades after 12 months.
If you open multiple cards and keep your balances low while making on-time payments, your credit score will recover over time. What’s more important is not applying for too many cards in a short period, which can signal to lenders that you are overextending your credit.
5. Myth: You Need to Frequently Use Your Credit Card to Build Credit
Fact: You don’t need to use your credit card frequently to build or maintain a strong credit score. The most important factor is that you use the card responsibly and make on-time payments when you do use it. Infrequent usage won’t hurt your credit score as long as the account remains open and in good standing.
However, credit card issuers may close an account due to inactivity, which could impact your score. To avoid this, use each of your credit cards at least once every few months for small purchases and pay them off in full.
6. Myth: You Should Avoid Credit Cards if You’re New to Credit
Fact: Credit cards are actually one of the best tools for building credit, especially if you’re new to credit. Using a credit card responsibly by making small purchases and paying off your balance in full each month helps establish a positive payment history, which is key to building a strong credit score.
If you’re new to credit, consider starting with a secured credit card or a student card, which are designed for people with limited credit history. Just be sure to manage the card responsibly to build a solid credit foundation.
7. Myth: A Few Late Payments Won’t Affect Your Credit Score
Fact: Even one late payment can have a negative impact on your credit score. Payment history accounts for 35% of your score, so missing a payment can lower your score significantly. Late payments are typically reported to the credit bureaus if they are more than 30 days past due, and they can stay on your credit report for up to seven years.
In addition to damaging your credit score, late payments may trigger late fees and higher interest rates on your account. To avoid these consequences, set up automatic payments or calendar reminders to ensure you pay on time.
8. Myth: Credit Cards Are the Only Factor in Your Credit Score
Fact: While credit cards play an important role in your credit score, they are not the only factor. Other types of credit, such as installment loans (like car loans or mortgages), also contribute to your credit score. A diverse credit mix can boost your score slightly, but it’s not as impactful as factors like payment history and credit utilization.
Managing both revolving credit (credit cards) and installment credit responsibly can help you build a strong credit profile, but credit cards remain the most common and accessible tool for building credit.
9. Myth: A High Credit Limit Will Hurt Your Score
Fact: Having a high credit limit won’t hurt your score—in fact, it can help. A higher credit limit gives you more available credit, which can lower your credit utilization ratio if you keep your spending in check. As long as you don’t max out your cards or carry a high balance, a larger credit limit can be a positive factor in your credit score.
The key is to maintain a low balance relative to your credit limit. For example, if you have a $10,000 limit, keeping your balance below $3,000 will help maintain a healthy credit utilization ratio.
Conclusion
Credit cards can be powerful tools for building and maintaining a strong credit score, but it’s essential to understand how your actions impact your score. By debunking common myths and focusing on facts, you can use your credit cards responsibly and make informed financial decisions. Always pay your bills on time, keep your credit utilization low, and avoid closing old accounts unnecessarily. With these strategies, your credit score will remain healthy, helping you achieve your long-term financial goals.