Your credit score is an indicator of how likely you are to pay back money loaned to you. It’s pretty important to make sure you have a good credit score.
In April 2017, the average American credit score for 18-29-year-olds was 652. For 30-39-year-olds, it was 671.
If your credit score is significantly lower than this, you need to examine where you have gone wrong. Then, take a look at what can be done to boost that number.
One of the easier places to start is with your credit cards. Understanding the relationship between credit cards and credit score can make it easier to build good credit over time.
Keep reading to find out how the two affect each other. You don’t want a bad surprise when you go to apply for your first mortgage.
Credit Cards and Credit Score: What Does Your Number Mean
First things first. Why does it matter if you have a good credit score?
Your credit score is used by a large number of financial institutions to determine your reliability. This means that your credit score affects all parts of your financial life. This includes everything from whether you qualify for an apartment, to how much you pay for homeowners insurance.
Your credit score even affects the interest rates on your credit cards. In that regard, credit cards and credit score go hand in hand.
Keep in mind that any score above a 720 indicates excellent credit.
Your credit score is calculated using several factors. Some of these factors include:
- the length of your credit history;
- the percent of credit utilization;
- your payment history; and
- your credit card balance.
How you use your credit cards can have a significant impact on your credit score, either negative or positive.
Just Having a Credit Card Helps
If you have never had a credit card, you may not even have a credit score.
While living with a coffee can of cash hidden in the backyard may have worked for our great-grandparents, you will at some point need credit.
Open a credit card account. Do some research and find the one card that fits your lifestyle.
You Don’t Have to Use the Credit Card
Now that you have a credit card, don’t cancel it. Even if you never use the card, keep the account open.
The length of your credit history is a factor in determining your credit score. Keeping the card with the longest history, even if you never charge a dime on it, can increase your score.
Additionally, your score is heavily influenced by credit utilization. Credit utilization is how much of your available credit you are actually using. This can also be thought of as your available credit ratio.
Keeping a card you don’t use seems counter-intuitive, but once you understand the math behind your credit ratio, you’ll see how important it is.
The Math of Credit Utilization
Let’s imagine that you have three credit card accounts open. Across all three accounts you have a combined credit limit of $10,000. You have a balance of $1,000 on one card.
In this scenario, your credit ratio is 10%, meaning that you are using 10% of the credit you have available to you.
Now let’s imagine that you close one of your cards that you don’t use. Your available credit limit across the two cards is reduced to $5,000. You still have a balance of $1,000.
In this second scenario, your credit ratio is now 20%. Closing an unused credit card has caused your ratio to increase.
On paper, it looks as though you are doing a worse job managing your credit. A higher credit utilization indicates to financial institutions that you may be living beyond your means.
Be Careful When Opening Accounts
As much as having a credit card and maintaining low credit utilization can boost your score, opening too many credit cards can ruin your score.
Only apply for credit card accounts that you know you’ll use. Each time you apply for a new credit card, an inquiry gets added to your credit report. Individual inquiries don’t affect your score too much.
However, a trend showing a large number of credit inquiries in a short period of time will lower your credit score significantly.
People who are applying for a lot of credit are usually living beyond their means. They pose more risk to lenders than people who don’t apply for many cards.
Be picky about the cards you choose to open. Does opening a new card to save 10% on a purchase make a ton of sense? Typically, no.
Pause before you fill out any application. Do a lot of research and only apply for cards that you need and will use.
Be a Responsible Card-Holder
Your payment history accounts for 35% of your credit score. This means that whether you pay your bill on time each month can make or break you.
Only charge items that you know you can afford. Set up automated payments each month so that you never miss a due date. Make sure you understand your interest rate before you choose to only pay the minimum amount due.
Being smart about how you use a credit card shows creditors that you can be trusted.
Boost Your Credit Score
Now that you have a better understanding of your credit cards and credit score, you see how simple it is to boost your credit score.
The average American household is dealing with roughly $7,000 in credit card debt. The average American credit score, across all age ranges, was 700 in 2017.
This shows you that there is a smart way to keep your credit score high while still accessing the credit that you need. Use these tips and tricks to start boosting your credit score today.
You’ll be happy you did when it comes time to apply for that first mortgage.
Looking for other ways to boost a bad credit score? Click here to learn how installment loans can help you rebuild a bad credit score.
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