Credit cards provide payment convenience and flexibility, and they can help boost your credit score if managed wisely. Numerous credit card-related factors affect your score, and it’s essential to know how to manage each. Here’s a rundown of the steps you can take to protect your credit score with credit cards.
Make Payments on Time – Payment history is the most significant determinant of your credit rating. Even a single late payment can negatively impact your credit.
- The impact of the late payment is highest when it first happens and gradually decreases in relevancy over time. Still, late payments stay on your credit report for seven years from the original date of the missed payment.
- The length of delinquency also affects your score. A payment that’s three days late will have less impact than one that’s 90 days late.
Setting up an auto-pay feature is one way to ensure that your credit card is always paid on time. Keep in mind that not paying the full balance will trigger interest due on the remaining balance, but if you’re working to build strong credit, automatic payments can help.
Consider Your Credit Mix – Generally, having a mix of credit types can help improve your score because it shows that you can handle different types of credit.
- The two main types of credit are installment and revolving. Mortgages, auto loans, and student loans are all forms of installment credit, while credit cards and home equity lines of credit are forms of revolving credit.
- Having at least one installment and one revolving form of credit can help your score, assuming payments are made on time.
Since credit cards are the most common type of revolving credit, responsibly managing a credit card can help add variety to your credit mix.
Establish Patterns with Age of Accounts – Age of accounts simply refers to the amount of time a particular credit source has been open and active.
- The age of accounts helps establish patterns in credit history. An account or credit source that’s only open a month or two doesn’t provide enough information to a creditor to assess credit risk, so accounts with established history can protect and improve your score.
People looking to establish a credit history for the first time can benefit from opening a credit card and keeping it active rather than opening and closing different cards each year. Those who already have established history may want to consider keeping their oldest source of credit open to keep a long age of accounts on record.
Keep Utilization Under 30% – Utilization is the second most crucial factor in a FICO® score after payment history. Utilization refers to the percentage of credit you’ve used out of the amount available.
- Lower credit utilization is more favorable than maximum utilization. Someone who has 95% credit utilization is close to maxing out their credit cards, and this can signal that they are not using credit wisely and/or that they may be at risk for late payments.
- Conversely, someone with a 10% utilization will appear less of a credit risk, and this lower utilization can help a credit score.
As a rule of thumb, your credit utilization should be at 30% or less. While it may be tempting to keep cards at max utilization to get points, miles, or other perks, that high utilization could hurt your overall score.
Manage Your Inquiries – Credit inquiries affect your credit score less than other categories, but it’s still important to know how they contribute to your rating.
- There are two types of inquiries – hard and soft. Hard inquiries are credit checks when you’ve applied for some type of credit, such as a loan or new credit card. Soft inquiries are credit checks that you make yourself, or checks that lenders make before offering pre-authorized credit.
- Soft inquiries do not affect your credit, while hard inquiries affect your credit differently. Certain hard inquiries, such as getting multiple lender quotes before applying for a mortgage, will not strongly impact credit because they are typically classified as a single inquiry for a single purpose. Hard inquiries can negatively affect credit when there is a sharp rise in new credit requests, such as opening three credit cards in the same week.
To help your score, it’s best to keep hard inquiries to a minimum and only apply for new credit when you really need it.
One final tip – keep an eye on your credit report. You can get a free copy each year at www.annualcreditreport.com. Reviewing your credit report in full can help you identify any fraud, understand your credit patterns, and give you a better sense of your complete financial picture.
Congressional Federal provides members with a range of credit card choices with benefits, including low rates, travel points, and cash-back features. Learn more about your options and find the right card for you.
