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Understanding Credit Scores

Credit Cards: A Blessing and a Curse

Credit Cards are a primary component of credit scores. Not having any credit cards will result in fair scores at best. However, having credit cards that are maxed-out (or multiple credit cards with balances over 50% of the credit limit) can damage your scores.

Some credit cards do not report credit limits (American Express and Capital One, for example). On these cards, the highest amount ever charged during a billing cycle is treated as the “limit”. The result is that folks using these types of cards for all their monthly expenses (chasing points/rewards) can appear to be maxedout even when they are paying off their balances in full every month.

Tips on Handling Credit Cards:

The balance you see on your billing statement is what gets reported to the bureau. What you pay it down to is not reported.

Anytime your reported credit card balance exceeds 50% of what the limit or high balance is, your score gets hurt.

Revolving debt usage: keep overall revolving balances to less than 50% of the limits/high balances

Whenever a new credit card is opened, your score is dropped anywhere from 15 to 30 points depending upon the new limit and balance ratio. Thus, chasing low introductory rates by doing a lot of balance transfers will lower your credit score. Closing an account immediately after opening doesn’t help and actually hurts.

The longer a credit card is open, the better the bonuses to your credit score. Having one high-limit credit card that has been opened for several years can provide significant score bonuses.

Raising limits on credit cards can help scores.

Having multiple, unused, zero-balance cards can actually increase your score since the ratio of balances to limits remains low.

Having credit cards with high balance-to-limit ratios will magnify any adverse actions like a missed payment or collection. A missed payment on its own may drop a score 15 points; a missed payment combined with a few maxed out credit cards can drop a score by 80 points.