The Two Most Important Factors for Your Credit Score
When it comes to using credit cards, there are five factors about them that are considered in your FICO credit score. But two of those factors are the most important, making up about 70% of what gets considered for your annual credit report. Those two factors are:
- How often you make late payments
- How much of your credit you are using
The first thing is pretty self-explanatory. The more frequently you have late payments, the worse your credit score will be. But did you know that your credit utilization rate – how much of your available credit you are using at any given time – also matters? It’s better to have more available credit than you are using for your credit score.
This means that it’s actually a good thing to have low-interest credit cards on your credit report, even more than one – so long as you aren’t maxed out on them all. Spread your credit card usage out over several cards to keep your utilization low, pay more than once a month to keep the balances down, and increase your available credit limits when you can to make your utilization ratio go down.
Closing High-Interest Rate Cards Could Hurt Your Score
One thing that many consumers do when they are approved for a lower interest rate card is to immediately close their old credit card with a higher interest rate. However, it may be better for your credit score to simply pretend the card doesn’t exist but keep the account open. This is because one thing that impacts your annual credit report is how old your lines of credit are. It’s better for your score if you’ve had open accounts in good standing for longer periods of time. Getting new credit is also helpful for your score, but the length of your credit history actually has a bigger impact on your score than getting approved for a new card.
Don’t Be Afraid to Open a New Card
One important thing to know about credit cards is that, so long as you are using them responsibly, having more than one card can be a good thing. The reason is, once again, the utilization rate. The more lines of credit you have open that aren’t maxed out, the lower your utilization rate will be. Being approved for new lines of credit also helps your score. Many consumers worry about applying for new cards because the credit check performed during the application can drop your score by a couple of points. However, being approved for a new card will typically make your score bounce back very quickly. Don’t apply for cards that you aren’t reasonably sure that you’ll be approved for, and this shouldn’t be a problem.
The Bottom line
The bottom line is that responsibly using multiple low-interest credit cards, and keeping your old higher interest rate accounts open, can be a huge help to your credit score.