Credit Cards Not Always Good for Your Credit

The Truth

Why are credit cards not always good for your credit? I know, I know you hear it all the time get credit cards to build/rebuild your credit. Well it is true that you need them for balancing the mix of credit on your report. I will tell you the same thing, but be responsible and keep the balance BELOW 30% of your available credit limit. This will help your credit score increase and stay up. Whenever you go over 50% of your available credit limit your scores start dropping, because red flags go up. The way the way the credit scoring module is set credit cards are just a part of how your credit score is established. That being said don’t believe that just because you get a credit card or two you score will go up 100 points in 30 days (don’t laugh I have seen this advertised on the internet) you need history ie… time.

Best Credit Card for Rebuilding You Credit

FICO Scoring

For the FICO scoring break down on how to mix up the credit you have and may want to get for the best possible scores. One last thing to remember, be responsible and pay your bills on time if you don’t you will kill your scores and have to start all over and creditors look at your history bad payment history means higher rates. We want to start off with the factors of credit scoring according to Fair Isaac Corporation. You may not recognize the name but, you probably have heard of your FICO score. They are number one when it comes to the credit scoring model. Consider these 5 factors.

Payment History:

has a 35% impact. Paying debt on time and in full has a positive impact, late payments, judgments and charge-offs have a negative impact.

Outstanding Credit Balances:

have a 30% impact. Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is NEVER a good idea to close an account; the debit ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving a balance from a 0% card to a 23% card will be minimal to what the increased mortgage debt might with a lower credit score. Hitting the maximums of available credit can be very negative. It may be worth calling an asking the credit company to increase your available credit to lower your debt ratio, provided they do so without a hard credit inquiry.

Length of Credit History:

has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger. Opening new credit cards will decrease the average length, and therefore hurt this portion of the score.

Type of Credit:

has a 10% impact. A mix of auto loans, credit cards, and mortgages is positive, rather than a concentration in credit cards only. Careful, too, when getting credit at a store that is not a department store: the credit agencies frown on cards for more specialized stores where you’re likely to only make one purchase, as they seem to show desperation.

Inquiries:

have a 10% impact. Hard inquires for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period for auto or mortgage and will be treated as only one inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that in a six-month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.