How Do Credit Cards Affect Your Credit Rating?

How well you manage credit card debt can impact your credit report. Some actions will lower your credit score, while other strategies can give your score a boost. Credit cards can be a valuable financial tool as long as you have the discipline to keep your spending under control. Whether or not having a credit card in your pocket is a good thing is entirely up to you.

Credit Utilization Ratio

Your credit utilization ratio -- or how much money you owe -- accounts for 30 percent of your Fair Isaac Co., or FICO, score. Consequently, how much credit you use can significantly impact your credit score. If you want to keep your credit score up, you need to keep your credit card balances as low as possible. Credit score models look at the amount of credit you have available on each card. A credit utilization ratio compares the amount of credit you have available to how much of that credit you use. You can actually lose points off your credit score by carrying a high credit card balance, since scoring models look at how much you charge versus your available credit.

Length of Credit History

Another key factor that scoring models consider is for how long you have used credit. Keeping long-standing accounts open establishes your credit history even if you don't use them often. Once you pay off an account and don't use it again, it probably won't appear on your credit report after 10 years. Some credit card issuers remove inactive accounts sooner so you lose the credit history once the account is removed from your credit report. Unless you keep other credit card accounts that you've had for a long time, removing an established account could have an effect on your credit score. Closing an aged account won't erase a bad credit history, but the move could lower your credit score, especially if you close an account with a good credit history. If you want to close an account, start by closing a newer account.

Credit Card Usage

Improve your credit score by using your credit cards. Charge to an account at least once every six months to keep a card active. Closing a credit card account won't help your score, but keeping it open might, as creditors look at length of credit history. Pay your credit card bills on time and keep balances low. Late payments and high balances hurt your credit score. Avoid opening new credit accounts you don't need, as lenders may consider you a higher risk if you have too many lines of credit available.

Credit Counseling

Credit counseling to get your credit card debt under control may hurt your credit score. Although the FICO scoring formula no longer puts weight on any reference to credit counseling that appears in your credit file, your credit score can still take a hit. If a credit counseling agency succeeds at negotiating a lower payoff settlement with a credit card issuer, that creditor may report you to the credit bureaus as paying late nonetheless. You are paying the debt, but not the amount you originally owed the credit card company.