How does your credit score work?
Let’s explore the major components of your credit that credit scoring agencies, like FICO and VantageScore, use to calculate your score:
- Your payment history. The timeliness of your payments comprises 65 percent of your FICO score. VantageScore calls payment history “extremely influential” in your score.
- Your credit utilization. Credit scoring companies look at how much of your available credit — in total and per line — you are using.
- The age of your credit history. Lenders want to see a long and active history of credit cards and on-time payments.
- Your credit diversity. A variety of credit indicates that you are an attractive borrower.
Why should I have several open cards?
Over time, having multiple cards can boost your score in two important areas:
- Your payment history. When you pay several credit card bills on time instead of just one, this component of your score will go up.
- Credit utilization rate. FICO likes to see a low credit utilization rate. Having multiple cards lowers this number by increasing your available credit and allowing you to spread your credit use across several cards.
What’s the right number of credit cards to have?
There is no magic number of cards you should shoot for to achieve a high credit score. Instead, let’s take a look at the credit cards of consumers with excellent scores.
Statistics find that the average individual with a FICO score exceeding 785 has 7 open credit cards. The average credit account is 11 years old and the most recently opened account is 28 months old.
While it may be OK to have a few cards, having lots of NEW cards probably won’t help you achieve excellent credit.
When should you not open new credit cards?
If you’re planning on needing a large loan within the next year, applying for new cards can hurt your score. Here’s why:
- Hard checks. When you apply for a new credit card, your credit history gets pulled. Lots of “hard checks” can negatively affect your score.
- Your credit age will decrease. The age of your credit is determined by taking an average of the age of all your cards. By opening lots of new cards, you’re bringing that overall average down, and therefore hurting your score.
- Your credit variety will decrease. Opening more unsecured cards with revolving credit will lower your credit variety because you’ll now have more unsecured lines than other types of loans.
- Too much open credit. Lots of open credit will negatively affect your VantageScore. This score is used for auto loans and other large loans; though most mortgage lenders only consider your FICO score.
Keeping your credit score strong can positively affect your finances for years to come.