How Credit Cards Affect Your Credit Rating

Credit cards are a very important piece of the financial puzzle. In fact, it is almost impossible to be approved for a loan or a mortgage if you have never owned one in the past. The main reason for this is that using a credit card is one of the only ways to improve your credit rating.

Banks look at your credit rating to access your risk. They want to know that you are likely to pay back the loan in full and on time and your credit history can show them that you’ve done this in the past. When you use a credit card, each of your monthly payments is marked on your credit report.

Below the relationship between credit cards and your credit rating is discussed in greater detail along with how you can best use your card to better your rating.

The Difference Between Banks and Credit Card Companies

Banks and credit card companies have very different ideas of the relationship between credit cards and your credit history.

For one thing, banks are generally uneasy if you have too many credit cards open, even if they all have a zero balance and even if your credit rating is perfect. Though it might not necessarily be the truth, many banks take having too many credit cards as a recipe for financial disaster.

To put things another way, banks worry about giving loans to those with multiple credit cards because they wonder if you’ll give their debt equal priority. Since you already have to make all those monthly credit card payments, will you be able to keep up with your loan payments?

At the same time that many banks are uneasy about those who have several active credit cards, they have no problem issuing new credit cards themselves. The reason for this is that they are able to collect interest on these cards. Money is money, after all.

On the other hand, credit card companies want you to have all the credit cards that you can get. As long as you pay them off on time and with the required interest, of course. If you do these two things, chances are that the company will offer you an increased credit limit or a new card altogether.

At the end of the day, credit card companies are more worried about whether you’ll pay off each of your cards on time than how much you owe overall.

The Role of Your Credit Rating

Your credit rating is basically a numerical assessment of how well you have paid off past loans and credit card payments. As mentioned above, it is used by banks and credit card companies to judge whether they should extend new lines of credit to you, by issuing you with credit cards for your credit rating.

Your credit card use is one of the most important factors to your overall credit rating. When you make your payments on time, this improves your credit rating.

Along with credit card payments, other types of loans are taken into consideration where your credit rating is concerned. Student loans, car loans, and other sorts of loans are also factored into the equation. When you pay off these loans on a regular basis, your credit rating improves.

Too Many Credit Cards

As was discussed above, having too many credit cards can negatively affect your credit rating and make banks less likely to give you loans. Luckily, there are a few easy fixes.

One thing that you can do is keep your credit-debt ratio low. This ratio takes into account how much of your current credit limit you have used up on each of your credit cards. Keeping the ratio under 30% is ideal and under 50% is all but essential. Better yet, pay off your higher-interest credit cards, cancel them, and stick with a single card, the one with the lowest interest.

The relationship between credit cards and credit rankings can be quite complex. The two go hand in hand and it is important to understand their relationship so that you can maintain the well-being of your financial health. By making your payments on time and not having too many credit cards at once, you’ll do wonders for your overall credit rating.

Laura Ginn appreciates that by using the right credit card you can stop any further damage to your credit score, providing of course that you meet all of your payments. Learn more about credit ratings and what they mean on the uSwitch.com website.

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