5 Ways Credit Cards Can Help or Hurt Your Credit Score

Credit cards can be a blessing or a curse for several reasons. If you overspend on credit cards and have to pay interest, you may be in a bad financial situation. The average credit card interest rate is 21.47%, according to the Federal Reserve Bank of St. Louis. But if you always pay your credit card bills on time and receive rewards, it can actually help improve your personal finances.

Here’s another important reason why credit cards can make your financial life much better or much worse. Using a credit card can have a big impact on your credit rating. And this number is very important. This is because landlords and most other companies you might want to do business with will look at this score. They use this to decide if you are a trustworthy and good customer to work with, or if you are untrustworthy and someone to avoid (or charge you more to rent).

So how can credit cards help or hurt your score? Here’s what you need to know:

1. Payment history may be affected.

Your payment history is the most important part of your credit score, accounting for 35% of your FICO® score (one of the most popular and widely used credit scoring systems).

If you pay your credit card on time or late, this will be reported to the credit bureaus and become part of your record. If you previously had good credit, falling 30 days late on a single payment can drop your credit score by more than 100 points. However, a history of paying on time will reflect well on you as a borrower and will result in a better credit score.

Setting up automatic payments for the minimum amount each month can help you make sure you pay on time and avoid damaging your credit history. Ideally, you’d want to set it up to pay the full amount owed, unless you’re worried about potentially overdrafting your bank account. This will help you avoid interest charges.

2. May affect utilization.

The second most important factor in your FICO® score is credit utilization, which makes up 30% of the FICO score formula. Basically, credit utilization is a measure of how much you owe and how much you could potentially borrow. So, if you have a credit limit of $1,000 and you borrow $300, your utilization ratio would be 30%.

A high credit utilization ratio is a red flag that can lead to a lower credit score. This is because using too much of your available credit can make you feel overwhelmed and out of control with your spending. On the other hand, keeping your ratio below 30% can help you get a better credit score.

Maintaining a low utilization rate means you can’t charge too much at once. If your limit is $1,000, try to keep your card balance below $300 if possible. You can make this easier by requesting a higher credit limit from your card issuer (you can log into your online account to see if you have the option to request a credit limit increase).

3. It can help you determine the average age of your accounts.

If you’ve used credit responsibly for a long time, that’s better than a shorter history because the lender will have more data to determine whether you’re responsible. As a result, 15% of your FICO® score is determined by your average account age.

Opening multiple new credit cards or closing existing card accounts at once will shorten your credit history and lower your score. On the other hand, keeping old cards open can be helpful. If you have a card that you have held for a long time, it is best not to close it even if you do not use it often.

4. They may give you different types of credit

According to the FICO formula, 10% of your credit score is determined by the different types of credit you have. So if you only have installment loans, like a car loan or mortgage, adding a revolving line of credit, like a credit card, could help your score.

Even if you don’t want to use a lot of cards, you can still get them. Sign up to pay by card for one streaming service each month and set up automatic payments for that amount. That way, you won’t risk going into debt, but you’ll get the benefit of having other types of credit on your record.

5. A credit inquiry may occur when applying for a new application.

Finally, each time you request new credit, you will receive an inquiry that will be kept on your record for up to two years. And the number of inquiries you make makes up 10% of your FICO® Score. Too much is bad news. This is because it signals to lenders that they can continue lending (and spending).

Don’t apply for multiple cards in a short period of time. If you want a new card every two years that offers better benefits or rewards, you can and should. However, it is not a good idea to apply for multiple chapters at once. Nor is applying for a new card right before you want to take out a big loan like a mortgage or car loan.

As you can see, credit cards can help or harm your credit score, depending on how you use them. Focus on keeping your bills low, paying off your balance each month, and opening new accounts infrequently.

NOTE: Our top-tier cashback cards now offer a 0% introductory APR through 2025.

This credit card isn’t just good. A truly outstanding card that our experts use personally. Features a long 0% intro APR period, cash back rates of up to 5%, and no annual fee! Click here to read the full review for free and apply in just 2 minutes.