Credit cards can evoke strong emotions. Some people love credit card rewards and perks, while others worry about the high interest rates and potential to overspend. Regardless of your stance, you may want to learn how credit cards can help or hurt your credit scores. Especially because the ideal approach doesn't require you to pay any interest or fees—it's a myth that revolving a balance helps your credit score.1
How Credit Cards Can Help Your Credit Score
There are several ways that opening and regularly using a credit card might help your credit scores.
1. On-time payments help your credit: Most credit card issuers report your account's information and payment history to all three major credit bureaus—Equifax, Experian and TransUnion. Making at least your minimum payments on time could help you build a long history of on-time payments and improve your credit scores.
2. They increase your available credit: A credit card's credit limit can increase your total available revolving credit amount. This can help you maintain a low credit utilization ratio, which is best for your scores.
3. They might diversify your credit mix: If you only have open installment loans, such as student, personal or mortgage loans, then a credit card could add to your credit mix because it's a revolving credit account. Having experience with installment and revolving accounts can help your scores.
4. Additional cards thicken your credit file: A “thick" credit file can also help your credit scores. Although lenders might have their own definition for thin and thick files, generally having more than five credit accounts (including both credit cards and loans) in your credit report is enough.2
How Credit Cards Can Hurt Your Credit Score
You'll want to be cautious because credit cards could also hurt your scores in several ways.
1. Missed payments can hurt your scores: Late payments can hurt your credit scores. And if you stop making payments, the card issuer could send your account to collections, which might hurt your scores even more.
2. You might use a large amount of your credit limit: If you have a high balance on your credit cards, the resulting high utilization ratio can hurt your scores.
3. Applications can lead to hard inquiries: When you apply for a new credit card, the card issuer will likely request a copy of your credit report and a credit score. A record of the request, called a hard credit inquiry, gets added to your credit report and might hurt your credit scores a little.
4. New cards lower the average age of your credit accounts: Opening a new credit card can also reduce the average age of your credit accounts. A higher average age is best for your credit scores.
Tips to Improve Your Credit
Applying for and opening a new credit card can affect several credit scoring factors, such as the age of your accounts and your credit mix. However, these are relatively minor factors compared to your payment history and current credit usage.
Make your minimum payments on time
The most important thing to do is make your credit card payments on time.
- • Ideally, you can pay your bill in full each month to avoid interest charges on your purchases.
- • Even if that's not an option right now, the on-time payments can still help your credit scores.
- • Setting up autopay for your minimum payment amount could help you avoid accidentally missing a payment.
If you miss a payment, try to catch up as quickly as possible. Although card issuers can charge you a late payment fee as soon as you fall behind, they won't report a late payment to the credit bureaus until you're at least 30 days past due.3 Also, the further behind you fall, the worse it can be for your credit scores.
Maintain a low credit utilization ratio
Your revolving credit utilization ratio is the percentage of your credit limit that you're currently using. It can be a major scoring factor, and the utilization ratio of your individual credit cards and your overall utilization rate are both important.
Here are the basics:4
- • Utilization only includes revolving accounts, such as credit cards and lines of credit.
- • You can calculate overall utilization rates by dividing the sum of your revolving accounts' balances by the sum of their credit limits. For instance, if you have two credit cards with $5,000 limits, you have $10,000 in available credit. If their combined balance is $2,500, your overall utilization ratio is 25%.
- • A low utilization ratio is best for your credit scores, and the people who have the top credit scores tend to have overall utilization rates under 10%.
- • You can quickly improve (or hurt) your credit scores if your utilization changes.
The tricky part is that credit scores use numbers from your credit report. These are often different from your cards' current balances because credit card issuers tend to send an update to the credit bureaus once every month, often around the end of your billing cycle.5
You might use your credit card throughout the month and have a $2,000 balance at the end of your billing cycle. At that point, the card issuer sends your credit statement and bill to you and sends an update to the credit bureaus. Your bill is often due around three weeks later. But, even if you pay in full, your credit report will still have the reported $2,000 balance.
If you want to use your credit card without hurting your credit scores, try to pay down the balance before the end of each billing cycle to maintain a low utilization ratio.
The timing also dispels the myth that carrying a balance is good for your credit score. A low utilization ratio is actually better than no utilization, as it shows you're using and managing your cards. But you can have utilization and still pay off your credit card in full each month to avoid interest charges.
Credit Card Best Practices for Improving Credit Scores
You can use a credit card to establish and improve your credit scores, but how you manage the card is important. For the best results, try to:
- • Make at least your minimum payment each month.
- • Pay down the balance before the end of your card's billing cycle to maintain a low utilization rate. Then, pay off the balance in full before the due date to avoid interest charges.
- • Keep old credit cards open to increase your overall available credit, which can help your utilization rate.
- • Sparingly apply for new credit cards to decrease the negative impacts of hard inquiries and new accounts.
RVC Offers Free Credit Score Tracking
You can request free copies of your credit reports from AnnualCreditReport.com, or directly from each bureau—Equifax, Experian and TransUnion. However, the reports don't always come with credit scores. If you want to track your scores, look into options from personal finance apps and financial institutions.
If you have a credit card from Riverstones Vista Capital , you can view your VantageScore credit score based on your TransUnion credit report for free. Monthly updates help you track your score over time, and you can learn more about the factors that can affect your score and tips for improving your score.
Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance and small business finance, and loves helping people find ways to save money. He also writes for Experian, FICO, USA Today and various fintechs.
READ MORE: Personal Finance 101: Credit Scores
Sources:
1. DeNicola, L. Myth Busting– You Don't Need to Carry Credit Card Balances to Improve Your FICO Scores. myFICO. Published May 8, 2023.
2. White, J. How to Strengthen a Thin Credit File. Experian. Published June 1, 2020.
3. Medine, T. Late Credit Card Payment? Here's What to Do. Experian. Published April 18, 2023.
4. Luthi, B. What Should My Credit Utilization Ratio Be? myFICO. Published February 9, 2022.
5. Gerson, E.S. When Do Credit Card Payments Get Reported? Experian. Published March 22, 2021.