Pennywise
Credit Cards And Credit Scores
by: Sahil | last updated: November 09, 2009
Category: Standard Credit Cards | Tags: Credit scores, credit cards and credit scores, fico, credit ratings
Category: Standard Credit Cards | Tags: Credit scores, credit cards and credit scores, fico, credit ratings
Credit cards play a vital role in determining the credit score of a person and need to be used with diligence in order to improve the score. The best way to improve the credit score is by paying off the credit card in a timely manner in full. Making the minimum payments will lead to accrual of interest and may negatively impact the score. Moreover full payments also ensure that your credit history improves from the lender’s perspective.
Credit scores are determined by factors such as timely bill payments, length of history of credit, credit utilization, types of credit used, and hard inquiries. The two most important factors here are the history of payments and credit utilization. They make up almost 65% of the weightage for calculating the credit score or FICO score.
The payment history affects the credit scores immensely and even one missed or delayed payment can bring the score down. The second most important point is the amount of credit that is used. If a person is not using the credit card often and the credit is sitting idle then it has a negative impact on the credit score. On the other hand if a person has utilized some of the credit on the card then this has a positive impact on the score.
The best way to make ensure that you increase the credit scores is by using at least two credit cards. This is especially true if you are a new credit consumer and want to build a healthy credit history. The credit score may be adversely affected if you start off with too many credit cards at one time. Handling a couple of credit cards efficiently is definitely better than bungling up the line of credit by poorly managing four credit cards.
It is also important to use a limited amount of credit out of the available amount since it helps in increasing the score. For example, using up 90% of your credit will have a less favorable impact on the credit score rather than using a modest 70%. Furthermore its advisable not to increase the credit limit just because it is offered by the credit card company. An increase in your credit score indicates that you are need of credit and may not favorably affect your score.
If there are any outstanding payments then it is better to pay them off as quickly as possible since these will remain on your credit history for at least seven years. If you do not pay off any outstanding bills then you may not get good credit offers at all and may end up paying a very high interest rate on the credit that is made available. If you are unable to make the payments due to financial hardship then its better to talk to the creditors about it. They may agree not to report the missed payment if you guarantee that you will pay up on a certain date.
Another factor that affects your credit score indirectly is the amount of interest that you are paying. If you are paying more interest then it means that you are spending more on interest rather than paying off the balance. This money that you pay towards the interest can be channeled for paying off the balance on your account. This in turn will ensure that you make timely payments and keep your credit scores high.
Another important factor to consider here is that credit cards are not the only forms of credit that affect your score. Other payments towards credit lines such as student loans, and even payment towards your medical bills have a part to play in the credit history of a person. Therefore it becomes important to take a holistic approach by considering improving all types of credit including credit cards.
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