How Credit Cards Affect Your Credit Score

Credit cards are a versatile and convenient financial tool that — if managed wisely — can help you build excellent credit and maintain a solid credit history. Because credit cards have a considerable influence on how your credit score is calculated, it’s important to fully understand their impact.

How do credit cards impact your credit score?

Credit cards affect your credit score in three main ways: utilization, payment history and age of credit. By managing how many credit cards you have, when you open or close credit cards, how you use them, and how you handle the payments you can use credit cards to build a great credit score. Read on as we take a deep dive into the key facts you need to know.

3 ways credit cards affect your credit score. 1) Payment history. Tip: Make on-time payments every month

How does opening a credit card impact my credit score?

Opening a new credit card may hurt your credit score in the short run, as it shortens your age of credit — but it can also help it with time. It depends on the time frame and how you use the credit card. Usually, you will see a credit score drop right after you open a new account, but with responsible use and on-time payments, you could see a boost to your credit score after three to six months.

There are three reasons your score can temporarily drop after adding a new credit card:

  1. A new credit card account will naturally lower your average credit age and that may also reduce your score.
  2. A new account on your credit record — if it’s one of many recent applications — might signal financial distress, which is why new credit is a factor in your credit score.
  3. When you apply for a new credit card, the lender will make a “hard inquiry” to evaluate your creditworthiness as a borrower. These credit inquiries can bring down your score, likely about five to 15 points, for a few months.

On the other hand, this new credit card will increase your overall credit limit and provide another account for you to build credit with on-time payment history and by demonstrating responsible use. If you keep the balance low and pay your balance in full every month, your credit score can improve over time.

Can opening a credit card be good for your credit score?

Opening a credit card could positively impact your credit score when you pay the balance in full and on-time every month. Here are three keys to remember:

  • Make an on-time payment of at least the minimum due each month.
  • Keep your balance low compared to your available credit.
  • Show a history of consistent payments.

How many credit cards should I have?

There’s no “right” answer here; it depends on how you manage your personal finances. A general rule of thumb is that the first three credit cards you have will positively impact your credit score. Having more than three cards most likely won’t produce any additional credit score improvement, but having more won’t really hurt your score either. Here’s a closer look at the impact of multiple credit cards on the credit score ranges of a VantageScore:

Chart showing the impact of having multiple credit cards can have on your credit score.(Note: this data removes people who have collections or past due accounts on their credit files to more clearly show the impact of utilization.)

How does using a credit card affect my credit score?

Using a credit card can affect your credit score in two ways: It raises your credit utilization (the amount of credit available to you versus how much of that credit you’re currently using); and it can help build payment history at the same time. Actively using a credit card and making on-time payments are fundamental to building a credit score.

There are benefits to keeping a credit card active, especially if it’s an account that you’ve had open for a long time. An easy way to keep a credit card active is to charge a small recurring amount periodically, say, maybe gas or a streaming subscription fee. Making just one monthly transaction on your credit card and then paying it off in full demonstrates ongoing, responsible use and is good for your credit score.

How does an inactive credit card impact my credit score?

An inactive credit card may not necessarily hurt your credit score but, at some point, an idle account could be closed by your credit card issuer after a certain period of time.

Inactive credit cards aren’t viewed the same as active ones and, if an account closes, three things could happen: You’ll lose that available credit; the average age of your credit history may decrease; and your credit utilization ratio will be higher.

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How does my credit utilization rate affect my credit score?

The amount of credit you are using versus the total credit limit you have is taken into account when figuring your credit score. Credit utilization, as it’s called, takes your outstanding balance and divides it by your credit limit. For example, say you have a credit card with a $2,000 credit limit and you have a $200 balance on it. Your credit utilization rate is 10%. This measure is calculated for each credit account you have, plus for all your credit cards overall.

In most cases, credit scores will improve as utilization decreases. That’s because low credit utilization shows lenders that you likely have your spending under control and the access to credit if you need it. High credit utilization may signal just the opposite — that your available credit is maxed out.

Check out the correlation between credit card utilization and credit score:

Chart showing the impact that your credit utilization rate has on your credit score.

How does closing or canceling a credit card affect my credit score?

Usually closing a credit card will lower your credit score. Closing the card impacts your credit score in two ways. Closing or canceling a credit card can affect your credit score because it may change your age of credit — a factor in credit scoring models. Generally, the longer your length of credit history, the better it is for your credit score.

Closing a credit card account also can increase your credit utilization rate, because it reduces the amount of total available credit you have across all your accounts.

Will my credit score improve or decline?

Whether your credit score improves or declines depends on how long you’ve had the credit card that you’re considering closing or canceling. Closing a credit card account that’s been open the longest may have the biggest negative impact on your credit score, because it will shorten your credit history. Canceling a newer credit card account that’s been open the least amount of time may even have a positive impact if it increases your average age of accounts.

Another point to consider in weighing the impact of closing an unused credit card has to do with credit utilization. Even a card you don’t use adds to your overall credit limit. Keeping, but not using, a card means your credit utilization will be lower — and a lower measure is always better for your credit score. However, if the card is unused long enough, the credit score may ignore the card for utilization calculations.

What if I close an unused credit card?

Before you close an unused credit card, it’s also worthwhile to assess a few more potential consequences. For example:

  • Spending risk: If you struggle to not overspend when you have available credit, it might be better to just close the credit card. Aside from accumulating unnecessary debt, a high utilization on that card could hurt your score, even if the credit limit is very low.
  • Financial flexibility: Does your income fluctuate from month to month? That unused card could give you access to credit to cover unavoidable expenses during a low-income month. Giving up that flexibility in a pinch could help avoid a financial crunch where you miss payments.
  • Annual fee: For some types of credit cards, an annual fee might be worthwhile, say, if the credit card offers other perks or is a type of rewards credit card. But if an unused card is simply costing you money, it might not be worth the cost to keep it open.

How can I make an unused card do more to improve my credit score?

Unused credit cards could positively impact your credit score if you use them to establish a history of on-time payments — no matter whether they’re $5 or $500. Here’s how: Put a low monthly bill, say Netflix for example, on a credit card you’re currently not using for anything else, and then set up automatic payments. You get three credit-score benefits from this strategy:

  • The low utilization on the card.
  • A record of on-time payments.
  • A longer credit history as the autopay arrangement keeps going.

The bonus? As long as you do this with a recurring bill you would pay anyway, and set up automatic monthly payments, you’ll improve your credit score without any new spending or effort.

FAQs

How do credit cards show up on credit reports?

Each credit card you have will appear individually in the “Trades” or “Accounts” section of your credit reports. This section of your credit profile may show:

  • The date of the account opening.
  • Current balance.
  • Credit limit.
  • Highest-ever balance.
  • Current payment status.
  • Payment history.
  • Minimum payment due.
  • Actual last payment amount – or the most recent payment that has posted to your account.

It will not show:

  • Information on specific transactions.

How do credit cards report to credit bureaus?

Credit card issuers typically report account activity at the end of each monthly billing cycle. That means everything on your monthly credit card statement reflects your account at the time your statement was processed. Day-to-day changes in balances aren’t reported.

Is it better to open a new credit card or increase the credit limit on a card I already have?

For a short-term credit score increase, it could help to increase the limit on a card you already have. If you only have one credit card and are looking to make long-term improvements to your credit, then a new card — and a commitment to on-time payments — could benefit you more. No matter what, always stay on top of your payments to keep the positive effect moving in the right direction.

If I pay off my credit card in full every month, is my utilization 0%?

Even if you pay your credit card balance every month in full, it’s unlikely you’ll see zero utilization on your credit report. Why? Credit card companies typically report your account information once a month, even if that balance may not be due for a few weeks. You may only be able to achieve a 0% utilization on a card if you don’t use the card at all.

Does it hurt my credit to have authorized users on my credit card?

Having an authorized user on your credit card won’t directly impact your credit, but it will impact the credit of the authorized user (provided the credit card issuer reports authorized user activity to the credit bureaus). If you have a credit card with a long and positive history, the authorized user should see that plus reflected on their own credit report, which can contribute to a good credit score. The opposite is also true: Any negatives will also have an impact.

That said, it’s important to note that you’re ultimately responsible for any charges an authorized user makes on your card. So, if charges add up and it causes a late or missed payment, that could affect both credit scores.

Does it hurt my credit if I am an authorized user on a credit card that is late, even if I didn’t charge on it?

Yes. Think of it as a partially shared arrangement. As an authorized user you can use the card to charge purchases. But you’re not responsible for the debt — the primary cardholder is. Late payments associated with the account — even if you didn’t make them — could result in both of your credit scores taking a hit.