How Credit Cards Affect Your Credit Score

March 10, 2008

More than three quarters of Americans have credit cards. Most households have more than four credit cards and a whopping 15% have at least 10. With this amount of credit card use, it is no surprise that credit cards greatly affect your overall credit score. Credit cards count for about 15% of your FICO, or credit, rating.

When an agency is reviewing your credit history, most want to see that you paid interest, as well as whittling the principal down. This will give lenders a good idea of how well you pay your debts, and how they can expect you to pay the additional debt if they give you a line of credit.

As far as your credit history is concerned, there is a fine line between having the right number of credit cards and having too many. If you have several credit cards, you may want to consider closing out one or two accounts. You might think that it is better to have only one credit card that you pay off each month, but this isn’t always true. If you buy groceries or gas each month with the same credit card, it will look like you carry that dollar amount from month to month and that you pay on time. It doesn’t show that you pay the entire balance each month, just your total balance at the time of reporting.

Another reason to have several accounts is that you will have a better ratio of debt to credit available. For instance if you have a balance of more than 75% on one card, it is best to spread that more than two cards. This way, it will appear that you have more credit available, about 72% of each card.

Closing out unused credit cards can lower your credit score by shortening your credit history and cutting down on the overall amount of credit you have available. At the same time, if you do keep open a credit card account that you rarely use, you should be aware that this, too, could have a negative affect on your credit history because the credit card company may stop reporting any activity at all.

Knowing how credit cards affect your credit rating can help you keep your credit history in shape. Regardless of how you manage your account over the long term, you should consider paying off all accounts a couple of months before getting a major credit line, like a mortgage. This will show the lender that you are a good manager of your debt and credit.

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