Understanding the Impact of Credit Cards on Your Credit Score

At O1ne Mortgage, we prioritize consumer credit and finance education to help you make the best decisions for your financial future. Whether you’re opening a new credit card, using it, or deciding to close it, each action can significantly impact your credit score. Understanding these effects can help you manage your credit more effectively. For any mortgage service needs, feel free to call us at 213-732-3074.

How Opening a Credit Card Can Impact Your Credit Score

Opening a new credit card account can have several consequences for your credit scores, both positive and negative. The exact impact will depend on the other information found in your credit reports.

1. It Adds a Hard Inquiry to Your Credit File

When you apply for a new credit card, the lender typically obtains your credit report and a credit score from one or more of the national credit bureaus (Experian, TransUnion, or Equifax). This results in a hard inquiry on your credit report, which can cause your credit scores to drop by a few points. Although the inquiry stays on your credit report for up to two years, its impact on your credit scores usually diminishes within a few months, provided you keep up with your bills.

2. It May Change Your Credit Mix

Lenders prefer borrowers who can manage multiple types of debt. Credit scoring models like FICO® Scores and VantageScores® measure this using a factor known as credit mix. Opening a new credit card can increase your credit mix if you have no other revolving credit, which could positively impact your credit scores.

3. It Reduces Your Average Age of Accounts

Credit scoring systems consider the ages of your oldest and newest credit accounts and the average age of all your accounts. Opening a new credit card shortens both the age of your newest account and the average age of all your accounts, which could negatively impact your credit scores.

4. It May Help Your Credit Utilization Rate

Your total debt, or amounts owed, is a significant component of your credit score. A new credit card with a zero balance increases your total available revolving credit, which can reduce your overall utilization rate and positively impact your credit scores.

How Using Your Credit Card Can Affect Your Score

Maintaining a credit card account over a span of years can have a more significant impact on your credit scores than merely opening or closing the account. Here’s how your usage patterns can affect your scores.

1. It Adds to Your Payment History

When you make charges on your credit card and repay the balances, you add to the payment histories recorded on your credit reports. Payment history is the single most important factor contributing to your credit scores. Making at least the minimum required payment on time every month generates a positive payment history that can promote credit score improvement over time.

2. It Will Affect Your Credit Utilization

A credit card’s utilization rate—its outstanding balance expressed as a percentage of the card’s borrowing limit—can significantly impact credit scores. Keeping utilization rates below 30%, and ideally below 10%, can help maintain or improve your credit scores.

3. Not Using a Credit Card Can Affect Scores Too

Letting a card go unused for an extended period creates a risk that the issuer will reduce your credit line or even close your account due to inactivity. Using each card to pay a small recurring expense and paying the bill each month can keep your cards active and add positive payment information to your credit reports.

How Closing a Credit Card Can Hurt Your Credit

Closing a credit card account can have negative consequences for your credit scores. Understanding these issues can help you anticipate and plan appropriately if you decide to close a credit card account.

1. It May Hurt Your Credit Utilization

Closing a credit card account lowers the total amount of credit available to you. If you have balances on other revolving credit accounts, your overall credit utilization rate will increase, which can hurt your credit scores.

2. It May Affect Your Credit Mix

Closing a credit card account will reduce your credit mix. If you open a new credit card account at roughly the same time you close another one, this impact could be negligible.

3. It Will Eventually Affect Your Average Age of Accounts

If a credit card account in good standing is closed, it stays on your credit reports for 10 years from the closing date. After 10 years, the account “falls off” your credit reports, and its age no longer counts toward your average age of accounts, potentially compounding the negative impact on your credit scores.

Frequently Asked Questions

How Can I Check My Credit Score?

You can check your credit score through various online services, including those offered by credit bureaus and financial institutions.

What Is a Good Credit Score?

A good credit score typically ranges from 670 to 739, while a score of 740 or higher is considered very good to excellent.

Does Using Your Credit Card Lower Your Credit Score?

Using your credit card responsibly can help improve your credit score. However, high utilization rates and late payments can negatively impact your score.

How Many Credit Cards Is Too Many?

The number of credit cards you should have depends on your ability to manage them responsibly. Having multiple cards can be beneficial if you keep utilization rates low and make timely payments.

The Bottom Line

How and when you open credit card accounts, use and repay your credit card debts, and choose to close credit card accounts can all affect your credit scores. Understanding the potential score impacts of these activities can help you make smart credit card decisions. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.