What is the impact of a credit card on your credit score? This is the question I set out to answer when I created the “credit card score,” a traditional letter grade that represents the relationship between your credit cards and your credit score. As the author of 7 Steps to a 720 Credit Score (Philip Tirone, 2008), I am well aware that credit cards will either help or hurt your credit score, depending on your behavior.
When calculating credit scores, the credit scoring bureaus take a look at five general categories:
- Your Payment History
- Your Outstanding Balances
- The Length of Time You Have Had Credit
- The Type of Credit You Have
- Credit Inquiries
Your use of credit cards will be reflected in each of these categories, so the impact of a credit card on your credit score is tremendous. And with the nation’s credit card debt expected to grow to $1.177 billion by year’s end, understanding the impact of a credit card on your credit score is becoming even more and more critical.
Your credit card score is generated by answering ten questions. Among others, the quiz asks these three questions:
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- How many major credit cards (Visa, MasterCard, American Express, Discover) do you have? You might be surprised to learn that you should have between three and five credit card accounts, that you should limit the number of retail credit card accounts you have in your name, and that you should never close credit card accounts, even if you have more than five.
- What is the balance you carry on each of your credit cards? Your credit card score will be lowered if your credit card balances exceed 30 percent of your credit card limits. Remember that your outstanding balances are a big part of your credit score, so an outstanding balance that exceeds 30 percent of the limit will have a major impact on your credit score. With this in mind, you should think twice before transferring balances to lower-interest credit cards. This might seem like a good idea at first glance, but it will hurt your credit score if your balance on the low-rate credit card exceeds the 30-percent rule.
- How often do you open new credit cards? If you open new credit cards all of the time, taking advantage of teaser rates, you should reconsider your strategy. When looking at the impact of a credit card on your credit score, remember that account age is one of the factors credit-scoring bureaus use to determine your credit score. Each time you open a new credit card, the average age of your accounts drops. When it comes to credit card scores and credit scores, old age is always better.
Want to get the full picture of the impact of a credit card on your credit score? Take the What Is My Credit Card Score Quiz. Are you passing or failing? Are your credit cards helping—or hurting—your credit score?