I’ll assume you know what a credit score is and how to calculate it. If not, read the deep dive: What Is a Credit Score and How Is It Calculated.
There are several ways credit cards impact your score. Let’s look at it using the key dimensions used to calculated the FICO Score:
- Payment History
When you pay your credit card bills on time, your payment history improves and your credit score will improve. Of course, if you don’t, the opposite will happen.
- Credit Utilization
In general, the more credit cards you have or the higher your limits are, the lower your credit card utilization will be. This is a significant benefit of having multiple credit cards, because your utilization is calculated across your lines of credit. For example, if you have one credit card with a $10,000 limit and you spend roughly $5,000 every month, you’re utilization will be 50% even if you pay off the balance in full every month. However, if you were to get another credit card that had a $10,000 limit, your utilization would be 25% ($5,000/$20,000). In this scenario, getting the additional credit card would almost certainly boost your credit score by a meaningful amount.
- Length of Credit History
When you don’t have any credit, then getting a credit card will start your credit history. However, if you already have some credit history, then a new credit card will bring down the average age of your accounts, impacting your credit score negatively. However, this impact is generally very small. Closing a credit card can also negatively impact your score, especially if it is your oldest account.
- Credit Mix
Opening your first credit card will improve your credit mix, but subsequent cards will have limited impact.
- Credit Inquiries
Apply for new credit cards will negatively impact your score, but this is generally small and temporary.
Impact of Opening A Credit Card
|Length of Credit History||Positive||Low|
|Credit Mix||None or Positive||None – Low|
|Overall||Generally Positive||Low to Medium|
Impact of Closing A Credit Card
|Length of Credit History||Negative||Low|
|Credit Mix||None or Negative||None – Low|
|Overall||Generally Negative||Low to Medium|
Of course, the impact on your credit score shouldn’t be the only factor you consider when opening or closing credit cards. If you’re not using a credit card that has a $200 annual fee, then the marginal and temporary negative impact of closing the card is likely far outweighed by the real cost of paying $200 every year.