The Impact of Credit Cards on a Credit Score

Credit scores comprise a number of key factors, including payment history and credit-utilization ratios. Credit cards play a key role in determining your score, and responsible use of them over time can significantly increase your score. Conversely, late payments or consistently being at or near credit limits are tangibly detrimental.

Balances Measured Against Credit Limits

Credit utilization is among the principal determinants of a credit score. With low balances, banks and other credit providers can generally assess that a consumer is not overextended and can responsibly handle additional debt. On the other hand, high balances compared to credit limits represent a red flag, and suggest that a cardholder may be tapping available credit by necessity rather than choice. The impact on a credit score is less apparent if only one out of five cards carries such a balance, but if most or all cards are maxed out, credit scores immediately decline.

Number of Outstanding Cards

A consumer may reasonably wish to take out two or three credit cards. Perhaps one offers a particularly low interest rate, another is an affinity card, and still another comes with attractive benefits. However, credit providers question the necessity for an individual to have six, seven, ten cards or more. Such widespread credit usage suggests a problem and increases the chances that a cardholder may run into difficulties.

Payment History

There is no substitute for a pristine payment history over time. This demonstrates responsible credit usage and a pattern of financial behavior quite attractive to lenders. While loss of a job or medical problems can negatively impact payment history and thus credit scores, their impact is relatively minor if addressed within months rather than years. Since credit cards remain among the most ubiquitous sources of credit, they are often the ones tapped most extensively and creditors closely look at their payment patterns.