How Credit Cards Affect Your Credit Score

  1. Some may think that applying for a new credit card only affects your credit score if you use the card. But in fact applying for a credit card compromises 10 percent of your credit score. It does not matter if you are approved for the card or if you use it; it is the inquiry that counts. Frequently applying for a credit card can hurt your score, so make sure you really need that new card before applying for it. And try not to apply for a new card 12 months before purchasing a new home.

  2. Some may think if they pay less than the minimum payment on their credit card bill it does not count as a missed payment. If you don't pay the total minimum payment on your credit card bill, your credit card company may report it as a missed payment; this can bring down your credit score.

  3. Some may think a high credit card limit can be a bad thing. Not necessarily, if you manage your credit cards wisely, a high credit limit can be advantageous. Thirty percent of your credit score is based on your debt-to-credit ratio (the amount you owe in proportion to your total credit limit). If you have a high credit limit and keep your balances low, your debt-to-ratio credit ratio is also low, which can help your credit score.

  4. Some may think you must carry a balance on your credit cards to build a credit history. Credit cards are a great tool for building your credit history, and you do not need to carry an unpaid balance to do so. Your best strategy is to use your credit cards and pay off the bill in full each month so you keep your overall debt-to-credit ratio limit low. And you are not paying compound interest; thus paying more, for the items you purchased.

  5. Some may think having more credit cards is better. Having more credit cards is not necessarily better. Ten percent of your credit is determined by the type of credit you have. For example, you may have student loans, a mortgage, and credit cards. The credit agencies look for a good mix. If all you have are credit cards, you may not help your score.