How Do Credit Cards Affect Your Credit Score?
Many elements of your financial acitivy are used to calculate your credit score. Credit cards affect several credit score factors, such as your credit utilization, types of credit and payment history. Credit cards are divided into two types of credit -- regular credit cards, such as those with the Mastercard and Visa logos, and store cards, such as those issued by Target and Old Navy.
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Utilization
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Credit card utilization, which is the percentage of available credit you are using at any given time, can have a significant short-term and long-term effect on your credit score. If your credit utilization is high -- such as 80 to 90 percent -- your credit score goes down. You gain points as your utilization goes down, so paying off credit card balances can be an effective way of rapidly increasing your credit score. Credit utilization is calculated by dividing your credit card balance by your credit limit. According to MyFICO, it is better for your credit score to keep your credit card accounts open instead of closing ones you are not using. If you close the credit card account, the limit on that card is not counted in your overall utilization numbers, so your available credit is reduced and your utilization percentage is higher than it would be if you had kept the account open.
Payment History
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Each credit card account has a payment history associated with it, whether the card is opened or closed. Negative credit card accounts, such as those that include late payments or are charged off, stay on your report for seven years. Positive credit cards can stay on your report forever, even if the card account is closed. Your payment history has a major impact on your credit score. If you have a late payment on your credit card history, it will bring your score down. If you make payments on time over a long period, the positive credit history brings your score up slowly.
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Types of Accounts
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Credit diversity is another area in which credit cards can help your credit score. Credit diversity considers the types of credit on your report, such as mortgages, auto loans and credit cards. Having a range of credit types increses your credit score. If you have each type of credit card -- a regular credit card and a store card -- that is a positive factor for your credit diversity.
Reestablishing Credit
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Credit cards can be used to establish positive credit following a foreclosure, repossession or bankruptcy. When a new, positive credit account is added to your file following the negative event, your credit score receives boosts in both the new account and payment history factors. Certain credit cards and credit card companies cater to people reestablishing credit accounts, although they have lower credit limits and higher interest rates to offset the risk.
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