How Credit Cards Impact Your Credit Score?
Having a credit card is a huge responsibility since the way you use it can affect your credit or CIBIL score. This score can determine your financial behavior and lenders or banks use it to analyze whether they should lend you money or not.
That means credit cards can affect your credit score right from the moment you open a credit account. Below are a few ways by which opening a credit card can impact your credit or CIBIL score.
It subjects your credit report to hard pull
Banks or lenders will inquire about your credit history to find out whether you are a responsible borrower. The enquiries are of two types, namely- soft inquiries and hard inquiries.
Soft inquiries don't have any noticeable impact on your credit score. Hard inquiries, on the other hand, can affect your credit. When you apply for a credit card, lenders subject your credit report to a hard inquiry, which can lower your credit score by a few points.
It’s important to note that a hard inquiry will remain on your report for two years. However, it will only affect your credit or CIBIL score for a few months.
It may affect your average age of accounts
The longer you've kept your credit accounts open, the better it is for your credit score. Especially, when you've kept your accounts active, and paid off your debts on time.
Opening a new credit card can potentially bring down the average age of your credit accounts. Whereas, closing one could have a much bigger effect on the credit length than opening one.
Another thing is, opening a new credit card account adds to your total credit limit, which can help reducing your credit utilization rate. It is highly recommended to keep your credit utilization rate below 30%.
How closing a credit account can impact your credit score?
When you close a credit card account, the amount of credit available automatically reduces. This, in turn, will increase your credit utilization, thereby affecting your credit or CIBIL score. That explains why you must keep your credit card accounts open, even if you haven’t used it in the past few months. That way, you can increase the amount of available credit you have in relation to the debt you owe. You can simply add a small recurring monthly payment to a card you haven't used recently in order to keep the account active.
Generally, it is best to keep credit card accounts open, but if you are paying too much annual fees for cards you're not using or are spending too much, your credit score won't be much affected if you close an account. If you pay off your balances every month, on time and have various other cards with a long credit history, the effect may be negligible.
Final Notes
By now, you must be having a clear picture of how credit cards can impact your overall credit score and report. To get a better understanding of how they impact your credit, you need to keep an eye on your credit score and report. Go ahead and avail a free credit report from three of the major credit bureaus.