Credit cards can have a huge impact on your credit score. Whether this impact is positive or negative depends on how you use your cards. It is therefore important to make sure that you use them as wisely as possible and that you understand how the various decisions you make with your cards will affect your credit report.
Here are three main ways your cards could either help you get a good credit rating and make you an attractive customer, or lower your rating and affect your ability to borrow affordably in the future.
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1. They affect your payment history
Payment history is the most important factor in the credit scoring formula used to determine your credit score. A positive payment history with no late payments shows you can be trusted to meet your obligations and pay as promised. But even a payment more than 30 days late could drop your score significantly, as it suggests to lenders that you may not always be responsible for the credit.
If you always pay your credit cards on time, it can help you develop a positive payment history that results in a high credit score. Consider setting up automatic payment so that an accidental late payment does not damage your credit report in the long term.
2. They affect your credit usage
The second most important factor in common credit scoring formulas is the use of credit. Your credit utilization rate refers to the amount of credit you use versus the amount of credit available. For example, if you had a credit card with a credit limit of $ 1,000 and you charged $ 900 on the card, you would have a utilization rate of 90%.
A credit utilization rate of over 30% worries creditors who think you may not be in control of your loan. Going above this amount can lower your score. On the other hand, the lower your utilization rate, the more positive the impact on your credit rating.
To make sure your cards are helping you rather than hurting your credit score, always try to keep your credit usage as low as possible – and definitely don’t go over your cards or go over that 30% ratio.
3. They impact the age of your accounts
The sooner you can open a credit card, the sooner you can start building a credit history. Credit history is an important factor in the credit scoring formula, and a longer history is better than a shorter history.
However, opening too many cards at once could have the opposite effect, as it shortens the average age of your credit report. So be careful not to open a lot of cards in a short period of time. You should also avoid closing old cards, which could also shorten your credit report.
The way you use your credit cards can have a positive or negative impact on your credit report. Make sure you use them wisely, as your credit score affects many aspects of your personal finances. You don’t want to damage it unintentionally and end up costing you a lot of money and hassle in the long run.