Credit cards and your credit score: Everything you need to know

Credit cards have the power to be transformative financial tools or costly liabilities, it all depends on how you choose to use them. Used wisely, credit cards help you build credit, unlock better loan rates, and boost financial flexibility. But misuse them, and credit cards can drag down your credit score. This can lead to more difficulty in getting loans, higher interest rates and even hinder your ability to rent an apartment or get a job.

Let’s break down the credit card-credit score connection and how to use credit cards to your advantage.

What you’ll learn

• What is a credit score and its components?
• How credit card actions impact your credit score
• Strategies for using credit cards to build and maintain a healthy credit score
• Common misconceptions about credit cards and credit scores
• Building credit one swipe at a time

What is a credit score and its components?

A credit score is a three-digit number that represents how likely you are to pay back borrowed money. It’s based on your past and current financial behavior, including things like payment history, amount of debt, length of credit history, types of credit used, and new credit inquiries. FICO and VantageScore are commonly used scoring models, both with scores that range from 300 to 850. The higher your score, the better.

While what goes into your credit score can vary a bit between scoring models, the main components are generally the same: The components of a VantageScore, which Alliant and many other financial institutions utilize, are below.

• Payment history (40%): The most important factor. Always pay your lines of credit on time. Carrying a balance and paying interest is preferable to not paying and incurring late fees while dinging your credit.
• Depth of credit (21%): Lenders like to see a mix of different credit types of credit, such as credit cards, auto loans and mortgages as it shows you can handle different forms of debt.
• Credit utilization (20%): Determine the total amount of available credit and aim to use no more than 30%. For example, if you have $15,000 in available credit across several credit cards, try to keep your total balances across those cards below $4,500.
• Recent credit (11%): When you apply for a loan or line of credit, a hard inquiry is made. Too many hard inquiries will lower your score since it may signal to lenders you are taking on too much debt or experiencing financial difficulties.
• Balances (6%): This category is calculated by looking at the total balances remaining on all your credit accounts, regardless of if payments are being made on time. While this category has a minor impact on your overall score, try to avoid a high overall balance.
• Available credit (2%): While this category only makes up 2% of your score, having a larger amount of available credit will have a slight positive impact.

How credit card actions impact your credit score

Your credit card decisions—whether opening, closing or increasing your limit—can either strengthen or weaken your credit score. Here are some common actions and how they can affect your credit score:

• Opening a new credit card. This action can help by increasing your total available credit, which may lower your credit utilization ratio. However, it also introduces a hard inquiry, which can temporarily lower your score, and reduce your average account age, which is an important factor in long-term credit health.
• Closing an existing credit card. Closing a credit card account decreases your available credit, which can raise your credit utilization ratio. If the closed card was one of your oldest accounts, it could also negatively affect your length of credit history.
• Increasing your credit limit. A higher credit limit lowers your credit utilization ratio, a key component of your score. However, this only benefits your score if you keep spending the same.
• Applying for multiple credit cards in a short period. Lenders see multiple recent hard inquiries as a potential red flag, possibly indicating financial distress.

Strategies for using credit cards to build and maintain a healthy credit score

Data from credit bureaus show that individuals with scores above 800 tend to exhibit a few key credit habits:

• Make on-time payments 100% of the time. Late payments can lower your score and remain on your record for years. Consider setting up automatic payments or reminders to help ensure bills are paid on time.
• Keep credit utilization below 30%. Ideally, staying below 10% results in the best credit score gains. Making multiple payments throughout the month can help you maintain a low balance.
• Keep old accounts open. Data shows that consumers with longer credit histories tend to have higher scores. Those that have a mix of types of credit (credit cards, mortgages, etc.) perform better as well.
• Regularly review credit reports. Checking for errors and disputing inaccuracies can prevent score drops from incorrect reporting. You can obtain a free credit report through AnnualCreditReport.com.
• Be strategic with new credit applications. Applying too often can create a pattern that lowers your score—space out applications when you can. If possible, try and apply for cards with pre-qualification. This process doesn't result in a hard inquiry and allows you to shop for options without damaging your score.

Common misconceptions about credit cards and credit scores

There’s a lot of misinformation about credit cards and credit scores and believing the wrong things can impact your finances. Here are some of the most common myths.

Misconception: Checking your own credit score lowers it

Clarification: A common misconception is that checking your own credit score can harm it. In truth, reviewing your own credit is classified as a "soft inquiry," which has no impact on your score. This differs from a "hard inquiry," triggered when a lender examines your credit report during a loan or credit application, which may slightly lower your score. By regularly monitoring your credit, you can quickly spot errors or detect potential fraud, helping you maintain a healthy financial profile.

Misconception: Closing unused credit cards improves your credit score

Clarification: Many people believe that closing unused credit card accounts will improve their credit score, but this isn't always the case. Closing an account reduces your total available credit, which can raise your credit utilization ratio—the percentage of credit you're using relative to your limit—and potentially harm your score. Moreover, keeping older credit accounts open can positively affect the length of your credit history, an important factor in credit scoring.

Misconception: Carrying a balance on credit cards boosts your credit score

Clarification: Some consumers think that maintaining a balance on their credit cards will improve their credit score. In truth, carrying a balance does not benefit your score and results in interest charges. It's more beneficial to pay off your balance in full each month, demonstrating responsible credit management without incurring unnecessary debt.

Misconception: Income level directly influences credit scores

Clarification: There's a misconception that higher income results in a higher credit score. However, income is not a factor in credit scoring models. Credit scores are calculated based on factors mentioned earlier, such as payment history and credit utilization. Having a higher income may help you qualify for more credit or loans, but it doesn't directly impact your score.

Building credit one swipe at a time

Think of your credit score like your financial GPA. Every responsible move—on-time payments, keeping balances low, using credit strategically—helps raise it. Over time, your smart decisions will compound and open up vastly more financial opportunities. The trick is to understand how credit works, what behaviors impact your score, and how you can use credit to your advantage.

Whether you’re just starting to build credit, repairing past mistakes, or maintaining an excellent score, remember that it's a continuous process. Similar to maintaining a healthy diet and exercise routine, good credit habits require consistent effort and discipline.

At the same time, don't be discouraged by small setbacks. Just like how one unhealthy meal won't ruin an entire diet, one missed payment or high credit utilization ratio won't permanently damage your credit score. As long as you continue to make responsible choices and stay on top of your credit, you’ll create a track record of financial reliability that will serve you for years to come.