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How a Credit Card Can Impact Your Credit Score

Your credit score is one of the most important numbers in your life. It will play a significant role in determining if you qualify for a credit card, auto loan or other types of financing. In fact, it can even influence how much you pay for auto, home or other types of insurance policies. Let's take a look at how this score is calculated and how credit cards help to shape your overall creditworthiness.

An Ability to Make Timely Payments Is Critical

Your payment history comprises 35% of your overall credit score. Therefore, if any of your credit card balances are past due, it's important to get current on those balances as quickly as possible. Doing so may help to increase your score by 50 to 200 points depending on how late your past due payments were.

Your Credit Utilization Rate Is Another Important Factor

To maximize your credit score, you should aim to use no more than 30% of the available balance on any one credit card. Furthermore, you should aim to use no more than 30% of the total balance on all of your credit cards. If you are struggling to stay below this limit, you might want to look into transferring your balances to a card with a lower interest rate.

This will allow you to put more of your monthly payments toward the principal balance. Many credit card companies offer 0% financing for new customers for up to 18 months, and in many cases, this rate will apply to both new purchases and balance transfers.

What's Your Average Credit Age?

Generally speaking, those who have longer credit histories are viewed as more reliable compared to those who have shorter credit histories. It's important to note that the length of your credit history is nothing more than the average age of your oldest and newest active accounts.

Let's say that your oldest active account was opened a decade ago while your youngest active account was opened last week. This would give you a credit age of five years. That's generally considered long enough for most lenders to provide financing at a reasonable interest rate.

Now, let's say that you decided to cancel the account that you opened 10 years ago while keeping the one that you opened last week active. In such a scenario, your credit history would literally span the course of seven days, which could make it harder to qualify for a loan. Therefore, it's generally not a good idea to close accounts that are several years old if you don't use them.

Credit Cards Can Help With Your Credit Mix

Your credit score will likely be higher if you have a mix of secured and unsecured loans. Examples of secured loans include mortgages or loans that are secured using funds in a bank or brokerage account. A credit card is considered to be an unsecured loan, which means that you don't need any collateral to obtain it. Therefore, opening a credit account could be a good idea if you want a quick way to boost your score prior to refinancing a mortgage or buying a car.

Using a credit card responsibly can help you create the type of borrower profile that lenders will love. This will make it easier to buy a home, car or other big-ticket items without creating a long-term financial hardship. It may also make it easier to get an education, start a business or otherwise invest in your future success in an affordable manner.