Credit score

How does credit card spending impact my credit score?

What is a credit score?

Your credit score is a number between 300 and 850 that summarizes the likelihood that you will repay money you have borrowed. This is also known as your credit risk and it is based on your lending and repayment history.

Which spending behaviors affect your credit score?

There are three key behaviors related to credit card spending that can impact your credit score:

1. Paying your monthly bill on time

Payment history has the largest weight when it comes to calculating your credit score. If you have a payment that is 30 days or more past due, your credit score will be negatively impacted and that missed payment will stay on your credit report for seven years.

The good news is that good payment history will stay on your report forever. So pay your bills on time, every time!

2. Managing outstanding balances

You may think that as long as you are making your minimum payments on time, your credit score is in the clear. But lenders also want to see that you are successfully managing the credit you have been given. If you have maxed out all your credit cards, this may indicate that you are overextended and might have trouble making future payments.

This is why your “credit utilization ratio” (outstanding balances compared to your credit limits) has almost as much influence on your credit score as paying your bill on time. A good rule to follow is to keep less than 30% of your combined total credit limit outstanding at any one time. For example, if the limits on all your credit cards add up to $10,000, it is best to keep less than $3,000 outstanding.  

3. Opening new cards

If you apply for every department store card to get the discount at checkout, or respond to each new card offer that comes in the mail, this can negatively impact your credit score.

Too many recent credit applications may indicate to a lender that you are taking on too much debt, or that you are in financial trouble. These credit inquiries remain on your report for two years, although they only impact your score for one year.

In order to maximize the positive impact your credit card spending has on your credit score, it is best to pay all your bills on time, maintain low outstanding balances, and avoid regularly applying for new credit accounts.

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Cari Lingle

Cari Lingle is an Accredited Financial Counselor for Foresters Everyday Money, providing unbiased financial coaching and education with the goal of improving the financial well being of Foresters Members. Supported by her background in both financial coaching and financial analysis, Cari writes about all aspects of personal finance including credit, debt, basic budgeting and current industry trends.