This post is a contribution from Stacy B. Miller who’s trying to make your finances look sexy. She writes a blog Kiss Your Money – it’s a beautiful website with a lot of useful personal finance tips. Do check it out. 🙂
“Your credit score and credit report are two of the most vital aspects of your financial health”.
Credit cards have a symbiotic relationship with credit score. In simple English, if you handle your credit cards well, then your credit score will go up. And, if you misuse your credit cards and accumulate debts, then your credit score will go down. It is true that you can use credit card debt relief options such as credit card debt settlement or credit card debt consolidation or bankruptcy to pay back your creditors and save money. But, the main damage has already been done. Missed payments have already been reported on your credit report. Your credit score is in a pathetic condition. Now, you have to build positive payment history to increase your credit score. And, this will take time.
How credit cards influence your FICO score
Here are a few ways in which credit cards affect your FICO score.
- Having a high or low credit utilization ratio: This ratio affects your credit score big time. Credit utilization ratio implies how much of your available credit is used in a month. You’ll have a high credit utilization ratio when you max out your credit cards. This will drop your credit score. For instance, if your credit limit is $500 and you spend $490, then your credit utilization ratio is 98 percent. The ideal credit utilization is 30 percent. The higher your credit utilization ratio, the lower will be your FICO score.
- Closing an old credit card: Credit history affects your credit score. Long credit history will make a positive impact on your FICO score. If you have a very short credit history, then closing an old account is not advisable. This will hurt your credit score more than anyone who has a long credit history with accounts in good status.
- Making late payments: Payment history accounts for 35 percent of your FICO score. This is one of the biggest factors that affect your credit score. One late payment can drop your FICO score drastically if you have a stellar credit score. For instance, a recent late credit card payment can drop your credit score by 90-110 points if you have a 780 credit score.
- Applying for credit cards: Applying for too many credit cards within a short span of time shows greater credit risk. When the details on your credit report show that you have applied for several credit cards simultaneously, your FICO score falls automatically. As per the researchers at myFICO, people who take up several credit cards within a very short period are a greater risk to default on payments. Because of this, the FICO score of these people may drop, especially if they have a short credit history.
A large number of hard inquiries within a short span of time is not good. Statistically, people with 6-8 hard inquiries on the credit reports have a greater chance of filing bankruptcy than the ones with no inquiries on their credit reports.
Words of wisdom
Credit cards are good as long as you make timely payments. This helps to build positive payment history and improve credit score. But if you frequently miss out payments or make late payments, then your credit score will go down. So, apply for credit cards cautiously. If you can afford to have only 2-3 credit cards, then don’t apply for 5-6 credit cards just because the offers are too good.
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