I know a lot of PF bloggers are really down on credit cards, and I think that’s reasonable.
They’re dangerous tools.
On the other hand, so are a lot of things that are also really useful: stoves (fire!), cars (accidents!), chainsaws (enough said!).
I’ve had a credit card since I was 18. As a freelancer in my early 20s, I used them to buy groceries during low times (and paid them off quickly), and now as a much more solvent 30something I use them for convenience and for rewards.
Back to the danger, though: the thing about credit cards is that they affect your credit score — the most important 3-digit number in your financial life. In this post, I’ll discuss how common ways of using credit cards affects your credit score, for better or worse.
1) The Older Your Credit Cards Are, the Better Your Score
I closed my first credit card (the one I got with a $500 limit when I was 18) many years ago, and now I wish I hadn’t! Because lenders want to see that you have used credit responsibly over a long period of time, your credit score depends, in part, on how long you’ve had credit accounts open.
For most people, their oldest accounts are going to include a credit card. Definitely keep your oldest card open if you’re concerned about your credit score, and in general, try not to close older accounts.
2) Credit Cards Can Help You Build Your Credit
One of the reasons why people have low credit scores is that…they’ve never had credit. It’s kind of a catch-22.
However, both for young people and for people recovering from financial trouble, there are special credit cards that will help you demonstrate that you can use credit responsibly. They’re not as good of a deal as other cards, and often have low limits, high interest rates, and no rewards. But if you are a responsible credit user, you’ll be able to move along to better products soon.
3) The More Available Credit You Have, the Better Your Score
The reason for this is because of something called the debt-to-credit ratio, which, to make a long story pretty short, is a fancy way of saying that when calculating your credit score, lenders are worried about whether or not you have credit you’re not using.
They like to see that you’re not using all your available credit — or even close to it — because if you are maxed out, that could be a sign that you’re not making enough money to pay your everyday bills. And if you’re not able to pay your current bills, then whoever is checking your credit is going to worry that you really won’t have enough money to make payments on the mortgage or car loan or credit card they’re thinking about giving you.
The upshot is that if you have, say, $25,000 worth of credit available on your cards, but are only charging a few hundred dollars a month, that looks great and helps your score. But if you’re maxed out or close to it, your score will drop.
4) Whether You Pay on Time Matters, A Lot
You don’t have to pay your bill in full every month in order to have a stellar credit score. But you do have to pay at least the minimum payment on time. This is one of the biggest components of your credit score.
You can put your minimum payment on auto-pay with most cards so you never miss one. If you make your payments on time, your score will go up; if you miss multiple payments it will drop precipitously. So be really careful here!
5) If You Apply For Too Many Cards Your Score Will Go Down
There are several reasons why you might apply for a new card even if you already have one. One of those reasons is that many offer lucrative signup offers. They also may have a superior rewards program.
Be careful, though, because if you have a lot of “inquiries” on your record (more than one or two per year) your score might drop because lenders will wonder why you need all this new credit.
Bonus tip: something that does NOT affect your credit score, contrary to popular belief, is whether or not you carry a balance. You can definitely pay that sucker off without hurting your score one bit! So please do!
Do you think about your credit score when you apply for a new card or consider closing an old one? Have you ever done anything with your credit cards that’s dramatically affected your credit score, for better or worse?
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I don’t pay too much attention to our credit scores, although I do know they are over 800. We are debt-free and extremely responsible with credit, so I don’t care if our score gets a slight ding when we sign up for a new rewards card.
Like Holly, we really don’t pay much attention to our scores either, although we do know our scores are over 800 or 820. Other than our mortgage we don’t have any debt and are wise with our cards so we’re fine with any fluctuations.
I wish more people knew that carrying a balance doesn’t help their credit score. Too many times I hear people say that they don’t pay their credit card bill in full because they want to build credit history.
Credit Cards are really dangerous if you are not a responsible user. It can have an impact on your credit score based on your payment history. Like in #4 of this article, it matters a lot to pay on time. If you are making late payments and / or not making payments at all you credit will suffer.
I love the extra perks of my credit cards, and am so glad that I developed good financial habits including paying off my card in full every single month so I can get all the benefits without the interest payments. Other than the cash/travel rewards, there’s the rental car insurance, charge protection (better than debit), extended warranties, no international fees, and more. We have applied for a ton of cards recently for home renovations to get the extra discounts because we are spending so much and surprisingly haven’t seen much of a drop at all in our credit scores. Which, honestly I think is a big fluke in the credit score system. I think the fact that someone had access to a ton of high interest debt, even if they aren’t using a large balance of it is a scary thing. Our credit scores are somewhere around 800.