Credit cards are a mixed blessing when it comes to your credit score. While prudent use of a card can improve your score, maxing out a card or failing to pay your balance will cost you in terms of your credit reputation. Learn to manage your card use and keep track of your balance situation to maximize your credit score.
The amount of money you owe to creditors accounts for about 30 percent of your FICO score – that’s the formula that’s most commonly used to calculate your credit score. That makes your total balance an important element in the mix. The amount you owe is compared to the total credit extended to you – the maximum allowed on your cards. If you run up a balance of more than 30 percent of your credit limit, it can have a negative effect on your score. Payment history accounts for the biggest single part of the score -- about 35 percent. Combining a high balance with a poor record of on-time payments could be disastrous for your credit score.
Carry or Pay Off
There is no positive consequence from carrying a balance from month to month. It is always viewed as a negative factor if you carry a balance without paying it off, even if you pay the minimum due. Your best strategy to maximize your credit score is to keep your credit card use at a level where you’re able to pay the bill in full when it arrives each month. The bonus is that you won’t have to pay interest charges.
Missing a Payment
If you miss a minimum payment, it can have serious consequences for your credit rating. If the card issuer notifies the credit bureaus that you are 30 days late, look for a serious dip in your score. Depending on your original number, the infraction can shave between 60 and 100 points off your credit score. If the infraction goes no longer than 30 to 60 days, while the effect on your score will be serious, it will likely be short-lived. If you make the payment when it is 60 days late and then keep paying on time, your score should recover quickly. However, if you have a payment that's 90 days late or, worse, goes to a collections agency, your score can take much longer to recover. A recent payment that's three months late can affect your score in much the same way as a bankruptcy filing. If you apply for credit in the future, it may be much harder to obtain if you have a 90-day late payment recorded on your report. Payment information factors into your score for years, though the negative impact can lessen over time.
While you don’t want to carry a balance, and you certainly don’t want to miss a payment, you do want to use your card. An inactive card does you no good in building your reputation for using credit responsibly. This means you should use your card regularly for minor purchases, keeping track so that your balance does not become too high in any one month, and then send in your payment promptly.