How Various Credit Card Actions Impact Your Credit Score
There’s a lot of confusion out there regarding how various credit card actions impact your credit score. This is important information to know, as your credit score plays an outsized role in many aspects of life. A good credit score can save you hundreds of thousands of dollars on finance charges over your life, while a bad one can cost you your dream job and make it hard to even find a place to live.
This article will help you understand how actions with your credit card affect your credit score. We’ll briefly cover what a credit score is and go over the different things that make up a credit score. Then, we’ll cover some of the most common credit card actions you can take and explain how they’ll affect your credit score. Finally, we’ve got a helpful FAQ for you to answer the most common questions about credit cards and credit scores.
Use the information in this guide to make informed financial decisions about what you do with your credit cards. You work hard for your money, and you deserve to enjoy it as much as possible. Smart credit score and credit card decisions are the key to making that happen.
Understanding What a Credit Score Is
A credit score seems scary and complicated, but it doesn’t need to be. All you really need to know is that a credit score is a prediction of how likely you’ll be to pay your bills on time.
The most common credit scoring systems have a range from 350 to 850. The higher your score, the more likely you are to pay on time in the eyes of the credit reporting agencies. That means you’ll get favorable offers for loans and credit.
While the exact scoring system to generate a credit score is a closely guarded secret, it is designed to push people towards the middle. That means the higher your score is, the more of an impact you’ll take from negative information on your report. It also means that people with extremely low scores can move up quickly towards the middle.
One consequence of the fact that the credit scoring formula is a secret is that it’s impossible to know for sure exactly how much something will affect your credit score. Experts can make general predictions, but that’s it.
That doesn’t mean that you don’t need to know what goes in to a credit score. The next section covers the five parts of a credit score. Understanding this will help explain why various actions with your credit card will affect your credit score.
Parts of a Credit Score
There are five major parts to a credit score. We’ll briefly cover each element below. Each explanation will explain how much the category influences your score and broadly explain what sort of things count towards that category.
Payment history is the largest component of a credit score. It makes up 35% of the score’s total. Your payment history covers all the bills you’ve paid and not paid that report to the major credit reporting agencies.
This section also includes things that happen when you don’t pay your bill. That includes defaults, charge offs, and serious delinquencies.
The next biggest credit score factor is credit utilization. It makes up 30% of your credit score.
Credit utilization refers to how much of your total available credit you’re using across all of your credit cards. For example, if you had a card with an $8,000 limit that had no balance, and a card with a $2,000 limit that was maxed out, then you’d be using 20% of your available credit.
The lower your credit utilization, the better your score. That’s because creditors see people with high utilization as more likely to miss payments or default on loans and lines of credit.
Average Age of Credit Accounts
The average age of your credit history makes up 15% of your credit score. The longer you maintain an account, the more information credit reporting agencies have. That means their scores are more accurate. AS a result, you get a boost for having a high average age of accounts.
Also, the longer you maintain an account, the more it shows you can effectively handle that kind of credit. That gives credit reporting agencies more confidence that you can effectively manage money.
Mix of Credit
The next area that goes into a credit score is the mix of your credit accounts. It counts for 10% of your credit score. There are two primary types of credit accounts, installment debt and revolving debt.
Installment debt is what things like loans are. You get credit or money upfront and then pay the loan back in installments.
The other primary type of debt is revolving debt. This type of debt is what a credit card is. You can use revolving debt, pay off some or all of the balance, and then use it again.
Credit scoring systems like to see a good mix of installment and revolving debt. That shows that you’re able to handle lots of different kinds of credit.
Finally, new credit counts for 10% of your credit score. New credit looks at how recently you’ve applied for or obtained new credit or loan products. Lots of requests for credit or loans suggest that you are or are about to have a hard time paying your bills. That can lower your credit score.
Different Actions You Can Take with Your Credit Card
Now that you understand how credit scores work, it’s time to look at how different actions with your credit card can impact your credit score.
This section covers the actions you can take with your credit card that will always improve your score.
Paying Your Bill On Time
The best way to boost your credit score with a credit card is to pay your bill on time. It’s important to note that you only get positive entries when you pay your bill. If your credit card always carries a balance of $0 because you don’t use it, then you’re not getting any good credit history because you’re not making any payments.
Paying Down Your Balance
The other thing you can do that will always help your credit score is to pay down your credit card bill. Ideally, you should be able to pay your credit card bill in full each month. That will keep your credit utilization low while also creating a payment history.
If you’re carrying a large balance, then you should work towards progressively eliminating it. That will lower your credit utilization. This will have an immediate effect on your credit score. In fact, this is one of the fastest ways to boost your credit score.
This section covers negative actions you can take with your credit card. These actions will always hurt your credit score, although the amount that your score is impacted can change based on many different factors.
Closing an Account
If you close a credit card account, then your credit score will go down. This happens for two reasons. The first is that it lowers the average age of your credit history. Also, when you close a credit card account you lose access to that credit. That lowers your available credit, which increases the percentage of credit you’re using. This, in turn, lowers your score.
Missing payments will also always hurt your credit score. Before you get super anxious, you should know that a missed payment isn’t reported until it’s 30 days late or more. That means if a bill slips your mind and you pay it a few days late your credit score won’t be impacted.
Carrying a Balance
Carrying a balance on your card also always lowers your score. It increases the amount of your available credit you’re using. However, the amount that this lowers your score changes based on how much of your available credit is taken up by your balance. The lower the percentage of your credit that you’re using, the better your credit score will be.
Actions that Could Help or Hurt
There are also a few actions you can take with a credit card that can either help or hurt depending on a few other factors. Also, sometimes an action can cause a small dip in your score, but then create an effect that will increase your score much later on. We’ll cover these actions here.
Open a New Card
Opening a new card causes a hard credit check. That will cause a small dip in your score. However, if you’re approved then you’ll also have more available credit. That will lower the amount of credit you’re using, which will give your score a boost.
However, if you start spending on your new card without paying it off, or start missing payments, then you’ll notice your score start to drop again.
Transfer Your Balance
Transferring your balance from one card to another will usually cause a net increase in your credit score. However, the point of a balance transfer is to quickly pay down your credit card debt. If you do this without re-establishing a balance on your old card, then your credit score can be improved substantially.
However, the temptation exists to start spending on the old card again. Should you do that and fail to pay it off every month, then your credit score will drop, as you’re not lowering your credit utilization.
This section will answer your questions about how different actions will impact your credit score.
General Questions About Credit Cards and Credit Scores
We’ll answer basic questions about credit cards and credit scores in this section.
What credit cards boost your credit score?
Any credit card where you make regular, on-time payments can boost your credit score. What’s more important is how you use your credit card when it comes to influencing your credit score.
How does excessive credit card debt impact your credit score?
That depends on how much of your available credit you’re using. The amount of debt you have doesn’t matter to your score because it looks at the ratio of credit available to credit used.
How Credit Scores Work
This section will answer your questions about how credit scores works.
Can you have a credit score without a credit card?
Yes, you can have a credit score 6 months after anyone starts reporting your payments or non-payments to a credit reporting agency. Landlords, utility bills, and more may report, but don’t have to.
Do I have a credit score with a debit card?
It’s possible – debit card usage isn’t reported to credit monitoring agencies. However, you could still have a credit score if a bill you pay reported to the credit scoring bureaus for at least six months.
Can you get a credit score on a debit card?
A debit card won’t give you a credit score. Debit activity isn’t reported to credit scoring companies. But you could still have a credit score from some other source.
Questions About If Something Hurts Your Credit Score
Lots of people wonder if different actions will hurt their credit score. We’ll cover those here.
Does closing a credit card hurt your credit score?
Yes – closing a credit card lowers your available credit and decreases the average age of your credit accounts. As a result, your score will go down.
Does cancelling a credit card hurt your credit score?
Yes – cancelling a credit card hurts your credit score for two reasons. It lowers the amount of credit you have available, so you are using more of your available credit. It also lowers the average age of your accounts.
Does applying for a credit card hurt your credit score?
A credit check for applying for a card will cause a small dip in your score. However, the impact won’t be very big and could be offset by a score increase if you are approved.
Does opening a new credit card hurt your credit score?
Opening a card doesn’t hurt your score. The credit check you get when you apply for a card will ding your score, but it’s likely your score will go up when you get your card as long as you don’t spend a lot on it and fail to pay it off.
Does not using a credit card hurt your credit score?
It depends – if you’re not using it but are paying off a balance, then it’s still helping your score. If you’re not making payments, then it’s not hurting your credit score, but it’s not helping it as much as it could.
Does getting denied for a credit card hurt credit score?
It depends – if the credit card company did a hard check on your credit before you were denied, then you’ll see a drop in your score. However, if they only did a soft check then your score will remain unchanged.
Does not using your credit card hurt your credit score?
No – it just doesn’t help your score. Your score is boosted by making payments. As long as you’re making payments on your card it will help your score.
Is having multiple credit cards bad for credit score?
It depends on how you use them. If you don’t carry a balance or only carry a low balance, then they probably help your score. However, if you have them maxed out or miss payments, then it hurts your score.
Does consolidating credit card debt hurt your credit score?
Usually consolidating credit card debt boosts your score. Consolidation turns revolving credit into installment debt. That lowers your credit utilization, and usually boosts your score.
Does settling a credit card balance hurt your credit score?
It depends. It’s better than continually missing payments. It also depends if the credit card company reports the settlement or just reports the account as paid. If they report the settlement, then it will lower your score. What’s important is whether or settling your balance will have a net increase on your score in the long term.
Does not using a credit card hurt my credit score?
No – as long as you’re making payments, then your credit card is building your score. If you have a zero balance and don’t use the card then you’re not getting the benefit of on-time payments on your credit report, but it’s not doing damage.
Does getting a second credit card hurt credit score?
It all depends on how you use it. Another card will increase your available credit, which could lower your credit utilization. However, you may see a dip from the hard credit check to get the new card. Moreover, if you spend on the new card, then it can cause your score do go down.
Do credit cards hurt your credit score?
Credit cards can help or hurt your credit score depending on how you use them. If you pay them off and don’t carry a balance, make regular on-time payments, and use them responsibly, then they help your score. If you max out the card or miss payments, then they hurt your credit score.
How to close credit card without hurting credit score?
There’s no real way to close your credit card without hurting your credit score. Your best option is to let the account go inactive. You can also put a small recurring charge on the account and make automatic payments on it to boost your score.
Does applying for multiple credit cards hurt your score?
No – the way that credit scoring works, multiple applications for the same credit product are treated as one attempt to get new credit. That lets you shop around to make sure you get the best rates.
Does paying off credit card early hurt credit score?
No, paying a card off early will not hurt your credit score. The payment will still be reported and you’ll get the benefit of lower credit utilization.
Will getting declined for a credit card hurt your score?
Getting declined for a credit card won’t hurt your score by itself. The only thing that could hurt your score is if the company did a hard credit check before they declined you. But this won’t have a huge impact.
Does having unused credit cards hurt credit score?
Having unused credit cards doesn’t hurt your score, but they don’t help it as much as they could. They still contribute to your available credit, but they don’t get on-time payment entries if you’re not making payments because there’s no balance.
How to switch credit cards without hurting credit score?
You can switch credit cards without hurting your credit score by just not closing your current credit card account. Just because the account is open doesn’t mean you need to use it all the time. If you want the maximum benefit, then you should leave it open, set up an automatic payment, and charge a small recurring bill to it every month.
How long does closing a credit card hurt your score?
There’s no single answer to this – closing your credit card hurts your score by lowering your utilization and decreasing the average age of your accounts. It will have complex effects on your score for a long time.
Questions About if Something Helps Your Credit Score
In the final section, we’ll answer your questions about whether or not something will help your credit score.
How much will paying off credit cards improve score?
There’s no way to tell how much an action will improve your score. Paying down a balance taps into the second-most important credit score factor, so it will have a large effect, but it’s hard to say an exact number.
Do prepaid credit cards build your credit score?
Only if you make payments on them. These are also called secured credit cards. They’re a popular tool for helping people rebuild credit.
How to improve credit score with credit card?
You can improve your credit score with your credit card by using it in a way that lets you pay the entire balance off every month. That will give you on-time payments and keep your credit utilization low.
How much will a secured credit card raise my score?
It depends on several factors, like what limit you get, what credit limit and utilization you already have, and so on. As long as you pay the bill off entirely and on time you’ll see a substantial boost in your score.
Will paying off credit card balance improve credit score?
Yes, paying off your credit card will reduce the amount of available credit you’re using. That’s the second most important element of your credit score, so it will have a big effect.
How can using a credit card help your credit score?
Using a credit card doesn’t help your credit score – paying it off does. You can improve your credit score by using your card in such a way that lets you pay down the whole bill at the end of the month. That will give you the biggest credit score benefit.
Are charge cards good for credit score?
Charge cards can be good or bad for credit, depending how you use them. As long as you pay them off in full and on time, then they’ll help your credit score.
Does having more than one credit card help your score?
The number of cards doesn’t have any major impact on your score – what’s important is that your payments are on time and you carry no or as low of a balance as possible.
Do store credit cards help your credit score?
Yes, store credit cards count towards your available credit limit and report payments to the credit scoring bureaus.
Does a secured credit card improve credit score?
As long as you use it responsibly, then yes, a secured credit card will improve your credit score.
Will getting another credit card help my credit score?
Maybe, it depends what you do with it. If you get even more debt, then it might hurt your score. However, if you pay it off and on time, then your score will go up.
How quickly does paying off credit cards improve credit score?
It depends on your specific credit situation, but credit utilization is 30% of your overall credit score, so if you go from using a lot of your credit to not using much of it, then you’ll see a large boost.
How to pay off credit card to increase credit score?
The best way to pay off your credit card to increase your credit score is to make a large payment a few days before your statement comes out. That way your payment is recorded but the amount of credit you’re using will be less than if you had waited.
Does increasing credit card limit help credit score?
As long as you don’t put an additional balance on the card. It increases your available credit, which reduces the percent of credit you’re using.
Does getting approved for a credit card raise your score?
Sometimes – the act of approval doesn’t change your score, but making on-time payments and keeping a low balance will help your score.
How many points does a credit card raise your score?
It depends on your specific credit situation and what you do with the card. A certified credit expert can provide a more specific answer based on your unique case.
Does paying your credit card in full help credit score?
Yes, paying your credit card in full keeps your credit utilization down and boosts your score. It also records an on time payment to help your payment history.
Does paying off all credit cards improve credit score?
Yes, if you pay off all of your credit cards, then you’ll be using 0% of your available credit. That will substantially improve your credit score.
Does paying off credit card early help credit score?
Paying off credit cards early doesn’t help your score because you’ve paid early. Instead, it helps your score because it means you’re using less available credit sooner. However, yes, paying off your credit cards will help your credit score.
When to pay credit card to increase credit score?
The best time to pay your credit card to increase your credit score is 3-4 days before your statement. That way you get an on-time payment recorded and the statement has the lowest possible balance on it. That means your credit score will show that you’re using less available credit, which raises your score.
Financial Advisor - Best.CreditCard
Michelle is part of our expert team of financial advisors with a proven track record in the credit card industry. After graduating with an Economics Degree focusing on Personal Finance, she got involved with several credit and debt counseling startups.