Having a credit card carries some benefits, but credit cards can also be damaging if they aren’t used the right way. Credit card use will impact your credit score in many instances, and could damage your credit if you aren’t careful about how you use your available credit or even the way you manage your credit card accounts at times.
While some experts discourage using credit cards at all, they are one of the easiest ways to build good credit when used the right way. Responsible credit card use shows that you have a good track record with money and sends the message to creditors that you are a good risk as a borrower.
What Constitutes Good Credit
There are two main ways of determining your credit score–the FICO score and the Vantage score. Both of these scoring systems consider similar information about the credit you have available, how much of it you are using, and whether you are paying creditors (including certain bills other than credit cards) on time.
While the two scoring systems use similar information and get it from the same three major credit bureaus (Experian, Equifax and TransUnion), they have slightly different standards and the Vantage score typically gives more weight to recent credit information over the last 24 months than FICO does. The FICO score designates a “good” credit score as between 670 and 739, while a Vantage score of between 700 and 749 is considered good.
How Credit Cards Can Damage Credit
There are several ways of getting and using credit cards that can damage your credit. Knowing how credit card use affects credit can help you keep your credit score in a beneficial range.
1. Opening too many new accounts.
One way of using credit cards that can damage your credit is opening multiple new credit card accounts. While the impact of opening one new account is small, maybe a 5 point drop in your credit score, opening 5 new accounts in a short period of time can lead to a 25 point drop, which could push your score down to the next level, like from good to fair or poor, in some cases.
2. Using too much of your available credit.
When you use more than about 30 percent of your available credit on a single credit card, you begin to look like a bigger credit risk to creditors, and your credit score will drop. Credit utilization accounts for about 30 percent of your credit score, and high credit utilization is cited often when credit bureaus give an explanation for why a credit score has been lowered.
3. Paying late.
While making a payment a few days late is unlikely to be reported to credit bureaus, a payment more than 30 days late will likely show up on a credit report and damage your credit score. Paying your credit card late also triggers some of the worst late payment fees of any creditors, which could make it harder to pay on time the next month as well.
4. Closing accounts with a long history.
Part of what goes into calculating your credit score is how long you have had your credit cards. A longer history of having credit is considered better, so you don’t want to close your oldest credit card even if you aren’t using it, because it will negatively impact your score. Closing cards you have obtained more recently will not have as large an impact on your credit.
5. Cosigning for someone else’s credit card.
Cosigning for another person’s credit card puts you at risk for damaging your credit score because if the other person doesn’t pay the card on time, it will damage both of your credit scores. Unless you can get notifications about the account and whether it’s being paid on time, it might not be a good idea to cosign, which makes you equally responsible for the debt.
Some Things That Don’t Damage Credit
1. Marrying someone with bad credit.
Your spouse’s credit score will have no direct impact on your own. Most credit cards issue the card to one person, then add an “authorized user” to the account if requested. The account holder’s credit score will be impacted by the activity on that account, but the authorized users will not be. Even in joint property states, credit scores for spouses will be kept separate.
Although a spouse’s bad credit can’t be transferred to the other spouse, however, your spouse’s bad credit can affect yours if you allow your name to be put on their accounts as a joint account holder, or if you allow the spouse to use your credit accounts and they do so in ways that lower the account holder’s (your) credit score.
While you naturally want to trust your spouse and believe they have turned over a new leaf with finances after having made mistakes that led to poor credit, it is sometimes best to keep accounts separate for a period of time until they have shown they are making better choices and have learned to be more responsible.
2. Checking your credit score.
Many credit card companies now provide free credit scores to cardholders, but don’t worry–checking your credit score, unlike applying for new credit, will not make your credit score drop even a little bit. Checking your score when not applying for credit is seen as a “soft” inquiry and will not have any impact on your score.
3. Paying off your balance each month.
There is no advantage to carrying a credit card balance from month to month, including no benefit to your credit score. One of the best ways to raise your credit score is to pay off credit card balances each month, and doing so will also ensure that you don’t pay any interest on your accounts and that your credit utilization doesn’t creep up past 30 percent and lead to a lower credit score.
4. Using prepaid credit cards.
Prepaid credit cards are not looked at as part of someone’s credit score because they are more like gift cards–the limit is whatever the purchaser of the card paid to load onto the card. Because they are prepaid, there is no credit extended in using the cards, therefore they don’t impact the credit score.
Safeguarding your credit score when using credit cards will ensure that you are eligible for a loan when you need to make a major purchase like a car or a home. Being responsible with something smaller like a credit card demonstrates to lenders that you are more likely to also be responsible when borrowing for larger items as well.
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