Credit is one of the most important aspects of a person's financial life. With credit being so important, it is necessary to maintain a high credit score. Borrowing money in the form of credit with the promise to repay allows consumers to gradually build their credit score. A credit card is one of the easiest forms of credit to obtain. Lenders are often willing to extend credit to borrowers with less than perfect credit. Depending on how the credit card is managed, it can have either a postive or negative effect on a credit score.
Payments
Creditors report payment information to the credit bureaus. If payments are consistently made on time, the card will help increase the overall credit score. When payments are late or not made at all, the creditor will report the delinquency to the bureaus. Negative reports have an immediate effect on a credit score. Payment history accounts for 35 percent of a credit score.
Credit Utilization
To properly manage credit cards, consumers should avoid keeping a high balance on the card. Some experts recommend keeping the balance below 30 percent of the available credit limit. If a person maintains a high balance on his credit card, it can potentially lower his score. Credit utilization is the amount of available credit compared to the total total credit limit. Consumers who want to avoid high interest rates can opt to pay their balance in full each month.
New Credit
The length of time a credit card has been established also factors into a credit score. A new credit card will not be scored as high as an older account. It may take some time to build the account history, but within months the credit card will begin to appear as an established credit account.
Credit Inquiries
Each application for new credit counts as an inquiry on a credit report. Too many inquiries can lower a credit score. If a person is applying for multiple credit cards, the score may drop in the process. When a credit card application is denied, consumers should avoid applying for more cards right away. Credit inquiries count for 10 percent of a credit score.
Multiple Credit Cards
Having too many credit cards can be seen by creditors as a drawback. Creditors do not want to offer credit to consumers who already have a large amount of credit. Even if the credit is not utilized, it may easily be accessed at any time. For example, a person who has thousands of dollars in available credit typically has enough credit. If borrowers are trying to gain more credit, lenders may become suspicious of their need for more credit. Credit should be a mixture of various types of credit, such as credit cards and installment loans.
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