Why Your Credit Card Score Is Critical to Your Credit Score – Part One
Welcome to Part One of my series: Why Your Credit Card Score Is Critical to Your Credit Score.
Most people think that the key to a good credit score is simply paying bills on time. But that’s not true. Your credit card habits (which I called your “credit card score”) make up a large part of your overall credit score. This week, I will explain why the number of credit cards you carry has a huge impact on your credit score.
The first component of your credit card score is the number of credit cards you carry. This is because the credit-scoring bureaus award more points to people with three to five credit card accounts. They will not award as many points to those with no credit cards, or those with only one or two credit cards. And they will be highly suspicious of anyone with more than five credit card accounts.
Therefore, if you do not have at least three active credit cards, you should open some.
To make the most of your credit card score, open three major revolving credit cards. Do not open retail credit cards. If you have retail credit cards, be sure to read the blog post about Retail Credit Cards, where you will learn that:
- Retail credit cards often end up costing you more than you will save with the one-time discount you might receive when you open the account.
- If you want to learn how to build credit, you will need to carry only three to five credit cards. Having a retail credit card is simply wasteful.
One thing to keep in mind when opening new credit cards is that your credit score will initially drop a few points. 10 percent of the credit-scoring formula considers inquiries by lenders into your credit score. Therefore, anytime you apply for a credit card, the credit card company will make an inquiry into your credit score, so your credit score will drop a bit at first. Don’t worry! In six months, your credit score will start to rebound, so long as you keep the balance below 30 percent and pay your bills on time.
I always tell people that if they have to open more than one card to reach the three-to-five requirement, they should open them all at once. Why prolong the agony? If you open one now, and another in six months, and a third six months later, you will have to wait a year before your score starts to build. If you open them all now, and then pay them on time while keeping the balance low, your credit score will start to climb within six months.
If you have poor credit, you might not be able to open a typical credit card. In this case, consider being
added as an authorized user to an existing account in good standing. Authorized user accounts help you borrow a family member’s positive credit history while you begin the process of building your credit card score and your credit score.
Another option for borrowers with poor credit is to open a secured credit card. Lenders that offer secured credit cards will require you to make a deposit that is equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you do not make your monthly payment, the deposit is applied toward your balance.
If you have more than five credit card accounts, do not close the accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing them might hurt your score and will never help your credit score. If you have more than five credit cards, we sure to read the blog called “Closing Credit Card Accounts” so that you know exactly what to do if you have more than five credit cards.
Be sure to come back next week for Part Two of my seven-part series: Why Your Credit Card Score Is Critical to Your Credit Score. And, don’t forget to register for my free teleseminar that teaches you how to negotiate with banks for lower interest rates.
If you are like most people, you have received several pre-approved card credit offers in the mail advertising low interest rates, an amazing new credit limit, or other special benefits. You might be wondering how these pre-approved card credit offers will impact your credit card score and whether they are a good deal.
Keep in the[...]
In a lot of ways, secured credit cards sound like a raw deal. Basically, secured credit cards—typically for people with poor credit and low credit card scores—require you to pay a deposit that is equal to or greater than the limit before the card will be activated. Then, you can use the account as you[...]
One of my favorite ways to boost a person’s credit card score is to teach them about the magic of authorized users. Authorized users are people who have permission to use other people’s credit cards. For instance, your husband might have a Citi card. His name, and his credit score, was used to apply for[...]
What types of credit do I need to get the best credit score?
Philip Tirone’s Answer: About 10 percent of your credit score is based on the various types of credit you have. Ideally, you should have:
Between three and five major revolving credit cards. (Read the post: “How Many Credit Cards Should I Have?”)
One mortgage.
One helpful[...]
When it comes to your credit score and credit card score, the older the better, meaning the older your credit history, the better credit score you will have.
Though 22 factors determine a credit score, these factors can be grouped into five categories:
1) Your payment history
2) The amount of money you owe
3) The type of credit[...]
A “credit card score” is a letter grade that reflects whether your credit card habits are helping you build credit or causing you to have bad credit: An “A” credit card score is excellent; an “F” indicates that you likely have bad credit. The lower your credit card score, the more likely you have bad credit and need to make immediate changes to your credit card behavior.