The mystery behind a credit score is something which intrigues a lot of people. Having a credit card is not as simple and direct as we imagine it to be. The credit score is one such instance. We are aware that credit cards in some way affect the credit score but how that mystifying process goes on demands a simple explanation. Right from applying for a credit card to closing/cancelling, everything effect your credit score. In order to grasp this underlying process, we have prepared a list of 6 important facts about credit cards which affect the credit score.

A credit score of an individual is computed on the information based on his credit report and points out the probability of someone’s efficiently returning the money he borrowed through his credit card. Each month or so the credit card issuer reports the account activity to the credit bureau to be included in an individual’s credit report. This implies that a person’s credit limit, payment history, credit card balance, account status, and the date he opened the account on will all influence his credit score.

As a credit card holder, always keep in mind what helps the credit score. Source: Gulf News

No Credit Card Affects the Credit Score

Not having a credit card does not affects the credit score, provided you never had one. Also, the absence of any financial history translates into the absence of a credit score which makes it difficult for an individual to get approved of various loan facilities such as car loan, house loan, education loan, mortgage loan etc.

The easiest way of building a credit score is by applying for a credit card and maintaining a proper repayment schedule. A well-managed credit will reflect a better credit score.

Randomly applying for a new credit card could impact the credit score. This is because when you apply for a new credit card, the lender evaluates important information to decide if your creditworthiness is convincing enough to lend you money or not and also to check your ability to timely pay the dues. The main information would be your credit report, which includes items such as your loan payment history and credit card balances. This is known as a hard enquiry, and making this, chunks your credit score by around 5 basis points.

Credit Limit and Balance Information

Most credit cards have a credit limit which is decided beforehand. It is the maximum amount of credit the cardholder is allowed to use. Using all the available credit makes one come off as a risky borrower which may lead to the hampering of the credit score.

Many credit card issuers allows high credit limit to the cardholders. However, it is recommended to keep the credit card usage amount below 30% of the credit limit so as to prevent yourself from looking like an irresponsible borrower.

Monthly Credit Card Payments

Our last credit card payment amount gets duly listed on our credit report but whether it will affect the credit score or not, that depends on the time of payment. Irrespective of that, the payment amount can indirectly affect our credit score. It is important to keep in mind that your balance relative to your credit limit is included in your credit score. Larger payments reduce the balance faster and boost your credit score.

The time in which you make your payment is the factor which influences your credit score. Make sure to pay on time in order to boost your credit score. Rest assured with the fact that late payments are only reported after a period of one month at least. So try to cover that up as early as possible.

Transferring a balance

Borrowers move debt from one credit card to another, generally to make the most of a lower annual percentage rate (APR). With transferring a balance to an existing card with a lower APR, one will be saving on interest but at the same time, it is also likely to hurt the credit utilization ratio and credit score.

Number of Credit Cards Affect Credit Score

There are motley of credit cards in the market and you can learn more about credit cards online to make a final choice. However, having too many credit cards is also not good for your credit score. Credit rating companies did not exactly reveal how having a particular number of credit cards influences the credit score. The number likely varies from person to person and his own credit report.

Closing a Credit Card Account

Having paid off the balance on an existing credit card, we may want to surrender the card. Closing the card reduces the total amount of available credit related to the balances which cause the credit score to decline. Closing a credit card might also affect your average account age, especially in the case if it was a long-standing account. The credit mix could also be negatively impacted.

Also, learn more about how to improve the credit score from the link. Thus, there are a number of underlying activities going on which many of the cardholders aren’t aware of. It is important to keep these factors in mind so that one can come to a right decision regarding the credit score.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to [email protected].