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In this article:
- How Opening a Credit Card Can Impact Your Credit Score
- How Using Your Credit Card Can Affect Your Score
- How Closing a Credit Card Can Hurt Your Credit
Acquiring a credit card account, using it (or not) and choosing to close it can all have significant consequences for your credit scores. Credit card activity can affect multiple factors that influence credit scores, including payment history, credit utilization rate, average age of accounts and credit mix. Here's what you should know about the effects credit cards can have on credit scores.
How Opening a Credit Card Can Impact Your Credit Score
Opening a new credit card account has several potential consequences for your credit scores, including some that can hurt your scores (at least temporarily) and others that tend to improve your scores. The exact impact on your scores will depend on the other information found in your credit reports.
1. It Adds a Hard Inquiry to Your Credit File
When you apply for a loan or credit card, the lender typically obtains your credit report and a credit score based on that report from one or more of the national credit bureaus (Experian, TransUnion or Equifax). That causes a notice called a hard inquiry to appear on the credit report of whichever bureau supplies the information.
Lenders view a hard inquiry as a sign you may have taken on new debt, details of which haven't yet appeared in your credit history. Because of that uncertainty, a hard inquiry typically causes your credit scores to drop by a few points. The inquiry stays on your credit report for up to two years, but its impact on your credit scores typically ends within a few months, as long as you keep up with your bills. New credit, including the hard inquiries it generates, accounts for about 10% of your FICO® Score☉ .
2. It May Change Your Credit Mix
All else being equal, lenders prefer borrowers with proven ability to manage multiple types of debt. FICO® Scores and VantageScores® measure this using a factor known as credit mix. Responsible for about 10% of your FICO® Score, credit mix reflects the number and variety of your open credit accounts.
Responsibly managing a mixture of installment loans such as mortgages, car loans and student loans, as well as revolving credit such as credit cards and home equity lines of credit (HELOCs) will tend to benefit your credit scores. Opening a new credit card account can increase your credit mix if you have no other revolving credit, which could have a positive impact on your credit scores.
3. It Reduces Your Average Age of Accounts
Lenders consider debt management experience a sign of creditworthiness, and credit scoring systems such as the FICO® Score and VantageScore encapsulate experience using the length of your credit history. More specifically, credit scores factor in the ages of your oldest and newest credit accounts and the average age of all credit accounts found on your credit report. The higher each of these figures is, the more it will tend to benefit your credit scores. Age of accounts is responsible for about 15% of your FICO® Score.
When you open a new credit card account, you shorten both the age of your newest account and the average age of all your accounts, which could have a negative impact on your credit scores.
4. It May Help Your Credit Utilization Rate
Your total debt, or amounts owed, is responsible for about 30% of your FICO® Score, and a significant component of that factor is credit utilization rate, the percentage of your available revolving credit tied up in outstanding balances. The FICO® Score and the VantageScore models consider the utilization on each of your credit card accounts and your overall utilization (the sum of all of your outstanding balances as a percentage of the sum of all your revolving spending limits). Utilization percentages that exceed about 30% tend to have a bigger negative effect your credit scores, and individuals with exceptional credit scores tend to keep utilization rates below 10%.
When you open a new credit card account with a zero balance, you increase your total amount of available revolving credit. If you have balances on other revolving accounts, the new account will reduce your overall utilization rate, which could have a positive impact on your credit scores.
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How Using Your Credit Card Can Affect Your Score
If you open and maintain a credit card account over a span of years, the way you use (or don't use) the card will likely have a much greater impact on your credit scores than opening or closing the account. Here's how your usage patterns can affect your scores.
1. It Adds to Your Payment History
When you get a new credit card, the card issuer typically begins reporting your account and its payment history to one or more of the credit bureaus. When you make charges on your credit card and then repay the resulting balances, you add to the payment histories recorded on your credit reports.
Payment history is the single most important factor contributing to your credit scores—responsible for about 35% of your FICO® Score. Making at least the minimum required payment on time every month generates a positive payment history that can promote credit score improvement over time. Just one payment that's 30 days late can cause a significant drop in your credit scores. (Payments that are less than 30 days late will typically lead to penalty charges from your card issuer, but they will not affect your credit scores.)
2. It Will Affect Your Credit Utilization
As noted above, a credit card's utilization rate—its outstanding balance expressed as a percentage of the card's borrowing limit—can have a significant impact on credit scores.
You probably know that a "maxed out" card—one with 100% utilization—hurts your scores, but balances that exceed about 30% of your balance can also negatively affect your scores. If you use a card regularly, its utilization rate naturally fluctuates, and if you run up a high balance, paying it down can help your scores improve relatively quickly. But don't forget that people with the highest credit scores tend to keep utilization rates below 10%.
3. Not Using a Credit Card Can Affect Scores Too
Letting a card go unused for an extended period creates a risk that the issuer will reduce your credit line or even close your account due to inactivity. Many card issuers will do one or the other without warning if your account is idle too long, with "too long" being whatever length of time the issuer decides it is. It's good practice, therefore, to avoid monthslong spans of inactivity on any card you plan to keep.
Using each card to pay a small recurring expense, such as a streaming subscription or gym membership, is a good strategy for keeping your cards active. Paying (or auto-paying) their bills each month also adds positive payment information to your credit reports, which can benefit your credit scores.
Note that if an issuer cancels a disused credit card, the account will be listed on your credit report as closed in good standing by the lender (assuming you made on-time payments when you used the card). Its payment history will remain on your credit report for 10 years from the closing date, just as it would if you closed the account yourself. Such an entry has no direct effect on credit scores, but loss or reduction of a card's credit limit could have the same secondary impacts on your credit scores as closing the account yourself, as discussed below.
How Closing a Credit Card Can Hurt Your Credit
You may have a good reason to close a credit card account, such as getting rid of an idle card that charges an annual fee. You should be aware, however, that canceling a credit card can have negative consequences for your credit scores. Understanding the issues involved can help you anticipate and plan appropriately if you decide to close a credit card account.
1. It May Hurt Your Credit Utilization
Closing a credit card account lowers the total amount of credit available to you. If you have balances on other revolving credit accounts, that means your overall credit utilization rate will increase. As discussed above, utilization rates that exceed about 30% can more seriously hurt your credit scores.
If you have no outstanding revolving balances on any accounts (in other words, your overall utilization rate is zero), canceling a credit card won't affect your utilization rate.
2. It May Affect Your Credit Mix
Closing a credit card account will reduce your credit mix. If you open a new credit card account at roughly the same time you close another one, this impact could be negligible.
3. It Will Eventually Affect Your Average Age of Accounts
If a credit card account in good standing is closed (by you or your lender), it stays on your credit reports for 10 years from the closing date. During that time, its age continues to be factored into your credit scores. After 10 years, the account "falls off" your credit reports and its age no longer counts toward your average age of accounts.
Along with average age of accounts, your FICO® Score also considers the ages of your oldest and most recently opened accounts. And as with average age of accounts, factors tend to benefit your credit scores the older they are. So if you close your oldest account, after 10 years, both your average age of accounts and the age of your oldest account could decline, potentially compounding the negative impact on your credit scores.
Frequently Asked Questions
There are many ways that you can check your credit scores so you can understand how lenders may view you as a credit applicant. Many financial institutions, credit card issuers and websites offer FICO® Scores or VantageScores based on credit reports from Experian and/or the other national credit bureaus. You can also check your FICO® Score for free anytime from Experian.
Both the FICO® Score and the VantageScore credit scoring systems have defined where good credit scores fall along the scale of 300 to 850 common to both scoring systems.
- FICO® Score: Breaking all scores along the 300 to 850 range into five segments, FICO defines "good" FICO® Scores as those ranging from 670 to 739. Higher scores are considered "very good" or "exceptional."
- VantageScore: VantageScore divides scores along the 300 to 850 range into four segments and classifies those in the range of 661 to 780 as "prime." Higher scores are considered "superprime."
No, the bare fact of using a credit card does not hurt your credit score. In fact, if you use credit cards regularly for moderate purchases and pay them off in full and on time every month, you'll generate positive payment information that promotes credit score improvement.
You can hurt your credit scores through imprudent uses of credit cards, such as:
- Making charges that exceed your borrowing limit
- Running up and sustaining a balance that exceeds about 30% of the borrowing limit
- Making a payment 30 days or more after its due date
There's no hard limit on the number of credit cards you can (or should) have, and as long as you use your cards wisely and keep up with your payments, they won't hurt your credit scores. Just one or two cards, used regularly and responsibly, is sufficient to establish a positive payment history that benefits your credit scores, however. As discussed above, adding new cards over time can increase the amount of credit available to you and help lower your overall credit utilization ratio, but doing so isn't necessary for steady credit score improvement over time.
The Bottom Line
How and when you open credit card accounts, use and repay your credit card debts, and choose to close credit card accounts can all affect your credit scores. Understanding the potential score impacts of these activities can help you make smart credit card decisions. Free credit monitoring from Experian alerts you to changes to your FICO® Score and can help you track the consequences of credit choices you make.
