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Many factors contribute to a person’s overall credit score. Although one item cannot erase a person’s score, credit cards can easily lower or drop a score in a very short time.
The article below will discuss how credit cards can hurt your credit score and how you can use a credit card wisely to improve your overall credit profile.
Available Balance is Too Low
5 main items make up our credit scores. Those items, and their corresponding weight on the credit score, are:
- Overall payment history – 35%
- Current available balances – 30%
- A mixture of types of credit accounts – 10%
- The overall length of time with credit – 15%
- Number of recently opened accounts – 10%
The second item, available balance, is very important.
When a person has a credit card with a $1,000 available limit, and they owe $900 on the card, then they only have $100 available to them in the case of an emergency.
An emergency can be anything simple like a flat tire that has to be replaced to a sudden medical scare that requires a $200 co-pay to start the surgery.
When the available balance is low, people do not have access to funds that would be necessary for an emergency. Which means they would need to either take money from savings or open a new loan. Either way, this puts the person at more financial risk.
Anything that increases the appearance of financial risk will be reflected in a lower credit score.
Bottom Line: For this reason, it is best to keep your available balance as high as you can. This means using a credit card only when you need to and having a plan to either pay it off when the bill arrives or pay it off within the next 90 days.
Too Many Inquiries Over a Short Period
It is always good to do your homework and find the credit card that is best suited to your current financial needs.
However, that does not mean you should allow every bank, credit union, and department store to review your credit file and make a decision about issuing a card to you.
When lenders, department stores, and other organizations see that you have 5 or more credit inquiries in a matter of days or weeks, it looks bad. It makes it seem as if you are desperate to borrow money. Desperation causes people to make bad choices.
If you are applying for a job, or a new apartment, or a new home then you do not want to give the appearance that you are frantic for money because of some unforeseen incident.
Bottom Line: Do not allow multiple credit card companies, a new employer, and a new apartment company to review your credit all within a few weeks of each other. It will greatly reduce your credit score.
Credit Card Account is Too New
While you may have a new credit card with a sizable available limit, and you have not charged anything on the card yet, this will not help your score.
To aid your credit history, the card will need to have some time on your file. The longer it is on your file in good standing, then the better the impact it will have.
However, a new card has no history. It has no late payments, but it also has no on-time payments.
The card is not maxed out, or over the limit, because it is new. Therefore, it does nothing to help improve your credit score.
Bottom Line: when you get a new credit card, be cautious with how you use it and give it a few months to have a positive impact on your score.
You Closed Out a Card with a Long, Positive History
There are lots of theories floating around the internet about how people should treat their credit cards. Some people advocate that you should stay away from credit cards completely while others think that the majority of consumers should have 2 to 5 cards in their name.
But there is one item that people can agree on: do not close out a credit card with good payment history.
Suppose you have a card that you have paid on for over 3 years. You finally are close enough to pay down the debt and decide with your next payment, you will ask the credit card issuer to close out the account.
This is a TERRIBLE idea.
If you have made payments on this card for years, and when you close out the account, in a sense you lose some of that good history.
While the account will show that you paid on time, the fact that it is closed will REDUCE your available balance (see first point above). When the available balance in your name is reduced, it will hurt your credit score.
Bottom line: if you have an older account and you have a good history with that account, do not close it out.
Too Many Credit Cards
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Another sign that someone is either headed for trouble or has the potential to get in a financial mess quickly, is a person with a lot of available credit cards.
Some people like to use cards for different reasons. One card is for buying clothes, another is used for traveling, and then one is for emergencies.
However, when a person starts to add more and more cards, to the point that they have 8 or more accounts, that is a big negative.
Although the cards may have low balances or even zero balances, there is the potential for disaster. With one afternoon of shopping or one major medical emergency, that person who has 8 credit cards could have them all maxed out. And that would put them in a terrible situation.
Bottom Line: Keep the number of credit cards low, under 5 if you can.
Amount Owed is Higher than The Limit
This is one of the worst things a person can do if they are trying to build up a credit file from scratch or they are trying to improve their overall credit.
You should never owe a balance on your credit card that is higher than the actual limit.
Suppose that you have some major problem with your car and the repair bill is $675. You go through your finances and remember that you only owed $200 on a credit card. Best of all, the card has a max charge limit of $1,000 which gives you enough to pay the car bill.
So, you use the credit card to get your car fixed, and you now owe $875 on the credit card. Oh, but wait, you forgot that the annual fee was coming due soon and that $39 gets added. Now the balance is $914.
To add insult to injury, you lose a few hours on your job and when the bill comes due for the credit card, you barely have enough for the minimum payment. So, you decide to wait until next month and pay $100 towards the balance.
Thanks to interest, and late fees, that $914 balance has now ballooned to $1,012.37
And your credit score suffers in a major way.
Bottom Line: Lenders and other groups that use your credit file to make a decision about you will not look favorably on an account that is over the limit. Do everything in your power to keep the balance owed on your credit cards under their maximum charge limit.
Late Payments
This major point was saved for last for one simple reason: it is the most important point.
Refer back to the first major heading of this article that explained that Payment History makes up 35% of the credit score. That is the biggest factor in a person’s credit score.
This cannot be stressed enough: do not pay your credit card late. ONE single late payment on one credit card account will do more damage than any other item mentioned previously in this article.
Credit cards are set up so that if you cannot pay the balance each month, you can at least make a small minimum payment to stay in the good graces with the card company.
However, if you do not even make the bare minimum payment on time, then it sends up lots of red flags. Those red flags cause your credit score to drop tremendously. And the worst part about this situation is that it will take several months to recover from one late payment.
Bottom Line: keep track of your money coming in, as well as your payments, and make sure to make credit card payments on time.
Final Thoughts
Credit cards will help a person rebuild their credit file or build a strong credit file from scratch if done in the proper method. By following the tips outlined in this article and avoiding the pitfalls that we mentioned, you should be on your way to a strong credit score.
Additional Financial and Credit Resources:
Before flying out the door to go look at houses, it’s important that you financially prepare yourself. Talking to an experienced Mortgage Loan Officer first will not only help you narrow down a price range to stay within, but it will also give you time to clear up any issues you may have in obtaining a mortgage.
Are you prepared to buy a house and get a mortgage? If you are not sure, take a look at this comprehensive guide by Petra Norris. You will learn how to make sure you are prepared to get a mortgage.
Owning a home can be a life-changing experience but if your situation matches one of these listed by Conor MacEvilly, then you may want to think twice before putting in an offer. Check out this article by Conor to learn the 5 types of people that should continue renting instead of buying a home.
About the author: This article “How Credit Cards Can Hurt Your Credit Score” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of his social media profiles as well as generating new leads from his website.
MadisonMortgageGuys.com and team provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.
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