Credit Cards and your Credit Score

Everyone knows (or I hope everyone knows) that your credit cards affect your credit score, that magic FICO (Fair Issac) number that companies use to determine the interest rate you’ll pay for credit. But there are a lot of myths and misconceptions out there as to how, exactly, your credit cards actually affect your score. While it may be a little like trying to determine the recipe for Coca Cola, there are some overall truths and myths that we can go over here to better clarify what counts and what doesn’t count when determing your credit score.

First question, because I know I’ve had that question in the past myself:

1. Does closing a credit card account affect my credit score in a negative or positive way?
No. Just like you can’t erase all of those pictures of you drinking too much at the company Christmas party that bill in IT posted on his blog, your credit history isn’t going to be erased, either in a negative or positive way. Having an abundancy of available credit will not get your credit score penalized by FICO. Opening a bunch of credit cards at department stores like The Gap, JC Penney’s, Sears, Target, Lord & Taylor, or wherever, as well as any Visa, Master Card, or American Express credit cards just to open them, however, might. Remember, you want to show you’re responsible with your credit–not that you know how to say Yes to every Tom, Dick, and Harry credit card company that comes your way.

A few things you should always consider when taking actions that may affect your credit score include:

• How long you’ve had your credit history (the longer the better, obviously)
• How you use your credit (do you charge large amounts or small amounts? Do you pay the minimum, or do you pay off the credit card?
• Do you open credit cards every two days and have a lot of credit card accounts open? Or do you show responsibility by having fewer open at any given time?
• Do you ever miss a payment on your credit card?

2. Will closing an account hurt my score or help it?
This is where we consider the amount owed on the card. Remember, your credit history will be based on how much you owe to various companies and your payment history on those accounts. If you close an account that doesn’t have anything owed on it, then this account will no longer be used in the determining your credit score. After 10 years, that account will no longer be on your credit history–which may not necessarily be a good thing. Having some debt may be a good thing, because if you are paying your debts it shows you are responsibly using your credit. In general, having a credit card open will help your credit score, because it shows that you actually have credit. A good guideline is to have some credit, just not too many accounts going at once with high balances.

3. Does it matter if I close the account or if the account is cancelled by the card issuer?
Nope. The FICO score will calculate the two as the same thing, so no worries on that front.

4. Does the card type matter when determing my credit score?
Nope. We’re only talking about credit card accounts here, so remember that your credit score isn’t only affected by the credit cards you use. Mortgage loans, auto loans, and any other credit you use also affects your credit score. But in general, a department store credit card such as a Saks card or any other card will be scored the same–it’s plastic, baby! But it is likely that a bank credit card will hold more weight in your score than a department store card.

5. Does the length of time I’ve had my card matter?
Yes. The longer your credit history, the better. Especially when it’s a good history. After a certain number of years, it  probably won’t matter too much, so if you’ve had your credit card for 12 or 15 years, you’re probably good either way. But it definitely makes a difference if you have had good credit for the past 4 years as opposed to the past 20.