When it comes to your overall credit score, one of the most impactful parts of your credit standing is your credit card. Today we want to discuss the importance of credit cards and what kind of impact they can have on your credit.
How to Build Credit with Credit Cards
One of the main advantages of credit cards is that they allow you to begin building credit history with on-time payments. When you consider the fact that payment history makes up 35% of your FICO score and is one of the largest portions of your FICO score, you begin to realize how important history actually is.
To get the most benefit out of your credit card, you need to make sure that you are paying your bill on time each and every month.
The Importance of Revolving Accounts
We have discussed on our blogs before the importance of revolving accounts and what makes them so incredibly powerful compared to installment accounts. They have a much larger overall impact on your credit score.
Revolving accounts, which include credit cards, often have a much greater influence on your overall credit score compared to student loan accounts, auto loan accounts, or even mortgages. Of course, this can be for better or worse.
What it comes down to is that you need to have positive credit card accounts. The only way to keep your credit in good standing is to properly manage your credit card accounts.
Having a Mix of Credit
The mixture of credit that you have only makes up 10% of your overall score. Even with that said, you still must consider how important it is. If your goal is to have a very high credit score or a perfect credit score of 850, this rings especially true.
A great mix of credit includes a wide variety of accounts, including installment accounts and revolving accounts. It would take an entirely different article for us to dive into the different types of accounts, but the idea is to have a mix of charge cards, service credit (utilities, cell phone bills, etc.), and installment credit (loans, mortgages, etc.).
If you have a thin credit file, credit cards can help you tremendously. If you primarily have installment loans under your name, then credit cards can work even better.
Credit cards can also add to the number of accounts that you have on file overall. This is a wonderful thing for the typical consumer. When you hear people talking about shooting for an 850 credit score, FICO says that people who often have high scores like that typically have an average of seven or more credit card accounts. These credit card accounts are either opened or closed.
Credit cards can feel incredibly intimidating, especially for those who are new to the game of credit or are not sure how to properly use them. However, credit cards, alongside authorized user tradelines, can provide consumers with major credit benefits if used the right way.