How Do Credit Cards Affect Your Credit Score?

The final phase of the Credit CARD Act went into effect this week. New credit card regulations protect consumers from the most egregious practices in the credit card industry. With the new rules has come a tightening of credit card application requirements and implementation of new fees as card issuers seek to limit their potential liability and recoup financial losses. Changes are causing some consumers to rethink the entire credit card issue and close some of their credit card accounts in protest.

Credit cards can make life easier but at a price. Card holders who don’t pay the full balance amount off every month are subject to relatively high interest rates. Late payments elicit hefty fees, usually raise interest rates and can have a negative impact on your credit score. While new regulations put some strictures on card issuer practices, the bottom line is that credit costs.

Credit cards work somewhat like a loan. The card issuer pays providers for your purchases, then collects the money from you on a monthly statement. Because you are in effect “borrowing” the bank’s money to pay for your purchases, there’s a penalty — the interest charge — if you don’t reimburse the card issuer on time. While most consumers understand this, they are hazy about how credit cards affect their credit score.

Credit scores are a measure of your ability to pay your debts. Credit scoring agencies look at both available credit and your payment record. Closing a credit card account has the potential to lower your credit score slightly by decreasing your amount of available credit. The way credit scoring agencies look at it, the more unused credit you have available, the greater your ability to pay debts, which translates into a higher credit score. While decreasing your available credit by closing credit card accounts can affect your credit rating, failing to pay credit card debt on time will have a far more disastrous effect on your credit score.

Before willy-nilly closing credit card accounts, it can be helpful to discuss the potential impact on your credit score with a credit repair professional. A credit repair professional can evaluate your total financial picture and suggest the most effective ways to pay down and limit credit card debt while protecting your credit score. He may also be able to suggest measures you can take to build up your credit score.