One's credit score holds significant sway in financial matters. It influences your capacity to acquire a credit card, borrow money, or afford mortgages. Furthermore, credit scores stretch their influence beyond credit regulations to deciding insurance premiums and influencing employer or landlord decisions.
Credit cards play a key role in shaping credit scores. The way they are used can either enhance or damage your score. So, how does this work?
The most common credit scores are FICO scores, which are offered in several variants, catering to credit card issuers, auto loan lenders, and mortgage lenders. You will likely have several FICO scores, and they may not be identical.
FICO scores depend on information in your credit reports given by your current and former lenders to the three major credit bureaus. These reports contain details about your loans, whom you owe money to, and the regularity of your credit bill payments over the past seven years.
FICO scores use five categories of information. They are Payment history, Amounts owed, Length of credit history, New credit, and Credit mix. Each category has assigned weights, indicating its level of importance as a predictor for future credit behavior.
For those starting their credit journey, getting a credit card without a credit score can pose a challenge. Nevertheless, some credit card companies offer cards designed for beginners, such as student credit cards and secured credit cards.
Through responsible use, you can create a robust credit history and a strong credit score. Another alternative available is to become an authorized user on another person's credit card, for example, a family member's.
Once you obtain one or more credit cards, regular timely payments will bolster your credit score. Conversely, late or missed payments, applying for numerous new cards within a short period, or maxing out your cards can negatively impact your score. Surprising as it may be, closing a credit card account can also affect your credit score adversely as it reduces the average age of your accounts.
Credit scores typically range from 300 to 850. FICO score classifications vary from 'Exceptional' (800-850) down to 'Poor' (300-579). Various banks and credit card merchants provide free access to your credit score. As there exist multiple types of your credit score, the one provided to you may not be an exact match with all the others.
Maintaining responsibility while using credit cards is essential in maintaining a strong credit score. Lack of prompt payments can lead to a decline. It is advisable to ensure that your bills are paid on time, which can be achieved through setting up automatic payments from your bank account. If payments become unfeasible due to overextension, help is available through organizations that offer nonprofit credit counseling.