How Credit Cards Can Affect Your Credit Score

Credit cards can be found in the pocket or purses of most Americans. Many use them frequently, and many do not stop and think about how purchases may be affecting their credit score. What may be a surprise for most is that your credit card purchases - as well as the amount of debt you have - can greatly affect your credit score. Here are some things you need to know about how the two interact - and what you can do about it.

Credit scores form the basis of determining your eligibility for future loans. If you hope to buy a home, or a car or boat in the near future and need a loan to do so, only a good credit score will enable you to get the best interest rates, the best terms, and the maximum loan amount. Your credit score affects your ability to get the best loan available.

Credit cards are commonly used for many purchases and this can make debt add up quickly. Remember, though, that the amount of debt that you have is reported to the major credit bureaus - Experian, TransUnion, and Equifax. Your credit report shows information about your payments, such as whether they are often late, on time, or less than the minimum.

If you have too much debt, it is detrimental when you are applying for a loan. Lenders, even credit card companies, look to see how much debt you already have before credit is given. The maximum amount of debt you can have and still qualify for a good mortgage or other loan is generally 30% to 40% of your debt to income ratio. This percentage does include the amount you want to borrow. The lender may reject anything going above that or additional interest will be charged.

Something else that is often not understood, though, is how too much credit can also hurt you. When a lender is considering giving you a loan, they have basically one thing in mind - can you pay it back on a regular basis? If you have too much credit, then, in their minds, there is always the possibility that you could still max out those credit cards you are not using - and not be able to make payments on their loan. You will likely either be rejected or have your interest rate raised on the prospective loan.

One secret to getting a loan at a good interest rate is to not have excess debt or credit. If you want the best terms on your new mortgage or loan, then you need to work on both of these areas. Pay down the debt on your credit cards and close out some of the superfluous credit cards. One good way to do this, if you have existing credit card debt, is to get a new balance transfer credit card and transfer the balances to the new card. Try to get one with a 15-month introductory period and 0% APR interest, for the longest and best terms. Then, be sure to destroy several of your old credit cards and work to pay down the debt within the introductory period. You also want to work hard at not putting significant purchases on your new card.

One more thing - if you are thinking about getting a loan soon, be sure to get a free copy of your credit report and check it for mistakes. Errors on credit reports are more frequent than people realize and can definitely put you into a different interest rate than what you deserve, or you could even be rejected for your loan. If corrections need to be made, be sure to notify the credit reporting agency and follow up that your credit report has been properly revised.