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Credit Cards and Your Credit Score

Part IV of the Credit Card Series: Start at the beginning if you missed a part.

Before the Credit Card

When you apply for a new credit card, the card issuer will run your credit report. This will affect your credit score. Because you are applying for credit, the inquiry will remain on your report even if the credit is not granted. Excessive inquiries will lower your score.

During the Credit Card


Image via Wikipedia

Pay your bill on time every month, and you will watch your credit score slowly (very, very slowly) climb. Pay off your balance each month, and your credit score will rise a little more quickly. When you carry a balance, you carry a higher debt to credit ratio, which reduces your score.

Pay your bill more than 30 days late once, and your credit score will drop up to 10 points. A payment more than 60 or 90 days late will decrease your score as much as 30 points. Pay your bill late twice in one year, and your drop will be closer to 25 points. Paying on time is critical to maintaining credit score health while using credit cards.

Throughout the life of your card account, the issuer will check on your credit to offer you perks or change your interest rate. These inquiries do not affect your credit score.

After the Credit Card

If you have made the choice to stop using a credit card, think before you call the issuer and cancel the card. A portion of your credit score is based on the length of time you have held certain accounts, especially bank and credit card accounts.

To show you have available credit you are not using, simply cut the card up or store it where you will not use it. By holding credit, which means not using it, you show you have the ability to manage your finances. This dormant credit reduces your debt to credit ratio and gives you more leverage when obtaining traditional loans.

Remember, if your card has an annual fee, you still have to pay it on time. Failing to pay, hurts your credit.

A Bad Ending

In the event your credit card is cancelled by the issuer, look for a blot on your credit report as big as 50 points. If an issuer writes off the amount you owe as bad debt, you are on the hook for the next seven years.

Even if you pay off the bad debt over time or in one lump sum, your credit score will take up to three years to heal. The write off and repayment remain part of your credit history for other creditors to see.

NEXT: Would you like to know how much debt is too much?


(c) Ann Marie Dwyer 2011
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