Getting Back to Credit Card Basics: 3 Ways Your Credit Card Helps Your Credit Score

Having your own credit card is an empowering feeling. With the swipe of a strip or the dip of a chip, you can purchase just about anything. But, with great purchasing power comes great consumer responsibility. Because, whether you realize it or not, the way you use your credit card can have a significant impact on your credit score, for better and for worse. So, let’s get back to credit card basics. Here are three ways you can use your credit card to help your credit score.

1. Your old credit card may be helping your credit score

As a responsible credit card owner, you like to keep your financial house in order. So, it probably appears a little untidy to keep old credit card accounts open, especially if they’re not being used. But, did you know that closing your old credit card accounts could actually have a negative impact on your credit score? That’s because when you close a credit card account, in addition to decreasing the length of your “credit age” (a longer credit history is always a good thing), you effectively reduce your overall available credit. And, if your existing debt remains the same, closing the account will increase your overall debt to available credit ratio. This is called credit card utilization rate, and the Fair Isaac Corporation (FICO) lists it as an important factor in determining your credit score. So, resist the urge to do a little spring cleaning when it comes to your credit card accounts, because out with the old can sometimes introduce brand new credit problems. This often means making sure to use the card periodically to keep it active, even if it is just for a small purchase.

2. Be careful about opening new credit card accounts

If closing a credit card can have a negative impact on your credit card utilization rate, it stands to reason that opening a new one will have the opposite effect, right? Not so fast. Every new credit card you open has the potential to reduce the average age of your credit history, and depending on how much you charge, it can increase your credit card utilization percentage, as well. That doesn’t mean you should never open another credit card again. It just means that you should be prudent about applying for a new credit card. Think through the process and pick a card that best suits your needs over the long term.

3. Watch your balance

One common credit misconception is that carrying a balance on your card is a good way to improve your credit score. And, while there are many intricacies to the credit reporting process, carrying a balance on your account after the payment due date won’t do you any favors. Your payment history accounts for approximately 35% of your credit score, according to the Fair Isaac Corporation, which means that paying your bills on time is a big deal. In fact, paying a bill more than 30 days after its due date will likely show up as a negative entry in your payment history. Plus, carrying a balance also influences your credit utilization rate, and has the potential to make you appear overextended and less credit worthy in the long run.