The Impact Your Credit Cards Have on Your Credit Score

The Impact Your Credit Cards Have on Your Credit Score

Written by Caitlin Wood
Last Updated October 8, 2020

The simple truth is that traditional lenders want to lend their money to credit worthy people. One of the ways they determine your credit worthiness is by looking at your credit score. Your credit score is a number that determines, for lenders, your ability to handle a loan responsibly and is largely influenced by your ability to settle your credit bills on time. In modern day finance lenders rely on your credit score to know how much credit they can grant and subsequently what amount of interest the credit will attract. In a nut shell, using credit and then paying if off on time increasing your credit score while making late or missed payment lowers your credit score.

What determines a credit score?

This is a question you will hear many times among credit users. Your credit score is calculated through the analysis of the data that appears on your credit report. The data is translated into a three-digit figure which lenders refer to while making decisions. Here in Canada credit scores range from 300 to 900, the higher the score you have the more desirable you are to potential lenders.

The two credit bureaus in Canada (TransUnion and Equifax) use 5 different factors to determine your credit score:

  • Your credit utilization ratio – this is the percentage of credit you have used compared to the amount of credit that you have not used. This determines 30% of your credit score.
  • Length of History – refers to the length of time since you started using credit. This determines 15% of your credit score.
  • New Credit – new credit refers to credit you have applied in the last six months. This determines 10% of your credit score.
  • History of payment – this shows how responsible you have been in paying your credit. This determines 35% of your credit score.
  • Type of Credit Being Used – explains what type of credit you are using. This determines 10% of your credit score.

Having understood how your credit score is calculated, it is important to note that your credit card bills have a pretty large impact on your credit score. This is because the credit information on your credit card is readily available to lenders such as the banks. They then use the information to limit or increase your credit amounts.

Impacts of late credit card bills on the credit score

Late repayment of your credit card bill has the following impacts;

  • Your interest rates will rocket; unreliable payment increases your interest rate. You will also attract a huge penalty which will do more harm to your interest rate and lower your credit score.
  • Your credit score will deteriorate; lenders want reliable borrowers. If you default on your credit card payments your credit rating will plummet. This affects your financial credibility and affects your future credit undertakings.
  • You will incur financial charges; delayed payment will cost you some extra fees that will be reflected on your next billing statement. An increase in payables increases the chances of having a lower credit score
  • Your credit report will be affected negatively. Late credit card bills repayment will reflect on your credit report. Lenders will be able to see your defaults and this lowers your credit worthiness.

As seen above your credit cards do in fact impact your credit score. To prevent your credit card use from negatively affecting your credit score you need to always make your payments on time and in full. You also need to use your cards responsibly; using your credit cards is a great way increase your credit score but maxing them out is not.

How to control credit card performance and boost credit score

  • Settle your bills as soon as possible – To avoid raking up too much high interest credit card debt pay your bill as soon as possible. You can even pay it off before it’s due, this will keep you from maxing out your card and spending money you don’t have.
  • Settle debts when due – Always, no matter what, pay your credit card bill on time. If you know your bill is extremely high for this month and you can’t afford to pay it in full, at the very least make the minimum payment. Late fees should be avoided at all costs – but please mindful of the minimum payment trap!
  • Avoid exceeding your credit limit on your credit card- aim at keeping your balance as low as possible. Always keep in mind that the high balances have negative impacts on your credit score.
  • Avoid applying for more credit cards – applying for too many credit cards will have a negative impact on your credit score. Each time you apply for a new card the credit card company will have to check your credit rating, too many of these will lower your score.

Credit cards are a great financial tool and if used properly they can and will help you build a healthy credit history, but if used irresponsibly they will have a negative impact on your credit rating. Credit cards are the number one most popular form of credit and therefore have a pretty significant influence over any potential lenders understanding of your credit history. To keep your financial future bright, use your credit cards to build a positive credit history.

For more information on credit card and credit card debt, click here.

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Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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