Top 3 credit score questions
From carrying a balance to cancelling your credit card, there are a number of ways your financial decisions can affect your credit score. Learn about the three biggest factors to building and maintaining a healthy credit score.
In this video, we'll answer three of the most common questions about credit scores:
One: Does carrying a balance on my credit card hurt my credit score?
It can. Your credit score is influenced by how much available credit you have and how much you owe on all of your accounts—this includes your revolving accounts—like credit cards and lines of credit, and your installment loans—like a mortgage or auto loan.
Credit cards are beneficial to have on credit reports because over time, they show a history of how well you manage credit. But if the amount you owe on your revolving debt is more than 30% of your available credit limit, it may have a negative impact on your score.
Since you don’t need to carry a balance on your cards month to month to show you’re using them, it’s usually beneficial to try and keep your revolving credit balance as low as possible. The best thing you can do for your credit score is to pay your bills on time and to pay more than the minimum monthly payment whenever you can.
Two: Does checking my own credit report affect my credit score?
Checking your own credit report isn’t going to hurt you. And it’s really a good way to stay on top of things to avoid any unpleasant surprises down the road.
In industry lingo, it’s considered a soft inquiry.
Examples of other soft inquiries are when companies check your credit for pre-approved offers, or when you apply for a job and your potential employer runs a credit check. Soft inquiries do not affect your credit score.
A hard inquiry, however, might lower your credit score by a few points. This can occur when you apply for new credit and the lender requests a copy of your credit report to decide whether to approve you or not. These inquiries may stay on your credit report for about two years. Hard inquiries can suggest that you're actively seeking or have recently taken out more credit.
Three: Will cancelling a credit card hurt my credit score?
It can. Your credit history is made up of a few different factors, one of which is how much of your available credit you’re using.
Let’s imagine you have three different credit cards, each with a $1,000 credit limit, so your total available credit on these three cards is $3,000. You currently have one card maxed out. So you owe $1,000 on your first card, $500 on your second, and your third card has a zero balance. In this scenario, you’re using $1,500 of the $3,000 you have available for credit, about 50%. Now, let’s say you picked up an extra shift at work and paid back $250 on your first card and the whole balance of $500 on the second. Nice work, by the way. Since two of your cards have no balance now, you close both of them. Your credit probably looks better to lenders now that you only owe $750 and you have less available credit, right? Not necessarily, because you now only have $1,000 in available credit. Remember, you closed two of your cards, which means the percent you’re actually using goes up, even though you owe less. On your credit report, it looks like this: you now are using $750 of the total $1,000 you have available. So now you’re using 75% of your credit. And that’s enough to have an impact on how lenders view you.
This isn't to say that you shouldn't close a credit card if you feel it's for the best, or replace a credit card with one with better terms. The main point is: you could have a better credit utilization ratio if you have some accounts open with no balance.
Remember, the best thing you can do for your credit score is to make on-time payments and, when you can, pay more than the monthly minimum. There are online credit score simulators that can help you estimate how paying down balances, or closing a card can impact your credit score.