The Effects of Credit Cards on Your Credit Report

Eric Vinje |

What is your credit report?

Your credit report is your credit history, as recorded in a file maintained and sold by consumer reporting agencies commonly known as credit bureaus. If you've ever applied for a credit card, personal loan, car loan, or mortgage, you have a credit report. Your credit report contains information about your income, debts, and credit payment history. It also includes information about whether you have been sued, arrested, or filed for bankruptcy. While your credit report is most often used to help a lender determine whether to approve or deny your application for credit, it may also be used to determine whether or not to approve you for insurance coverage, rent you an apartment, or offer you a job.

Because credit cards are relatively easy to obtain, applying for and using them may help you establish a credit history. But whether your history will become a good one or a bad one will depend on how you use the cards.

Credit cards can have a positive impact on your credit report

Retail charge cards can be a good way to establish credit

Charge cards associated with a particular merchant (e.g., a department store or an oil company) are often the first credit cards that new users obtain. Because the card limits are generally low, you may pose little risk to the creditor, and so you may be approved with little or no credit history. Using these cards responsibly may help establish your creditworthiness for more significant credit (such as a vehicle loan or a mortgage) in the future.

Secured cards can be the first step toward repairing your credit history

If your credit report shows that you've been delinquent on your credit payments or declared bankruptcy, you will probably have trouble reestablishing your credit. However, you may be able to qualify for a secured credit card. To reduce the risk your prior credit history indicates you pose, you're required to deposit money with the issuer of the secured card that partially or completely covers the amount you may charge on your card. If you default on your card payments, the issuer may withdraw the money you have on deposit to repay the debt. In some cases, however, the card may be converted to an unsecured card if you make satisfactory payments for a specified length of time.

Tip: Your secured card will strengthen your credit report only if you keep up with the payments. Even though you have money on deposit with the card issuer to secure the debt, you must pay at least the monthly minimum to keep your credit history from looking even worse.

Credit cards can have a negative impact on your credit report

Applications for credit are reported to credit bureaus

When you apply for a credit card, the lender requests a copy of your credit history. These requests are recorded on your credit report as inquiries; they remain on your report for 24 months. Lenders may become suspicious if they see numerous credit applications within a short period of time. Fearing that you may become overextended on the amount of debt you can handle, they may deny you credit simply because you've applied for too much.

Tip: Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), credit bureaus are required to notify you if your credit report is adversely affected by too many inquiries.

Late and missed payments appear on your credit report

For each credit account you have, your credit report will contain a detailed history of your payment record over the last 12 to 24 months. Derogatory notations on your credit report may remain there for seven years or longer, depending on the type of notation. Each time you're late making your credit card payment or miss a payment, you're undermining your credit history and weakening your chance to obtain loans in the future.

Tip: Under FACTA, creditors are required to notify you if they supply the credit bureaus with negative information about your credit transactions.

Open accounts with no balances also appear on your credit report, even if you don't use them. Because they increase your potential debt-to-income ratio, open but currently unused accounts can prevent you from obtaining new credit. To prevent this situation, get a copy of your credit report. If your report shows that you have cards you no longer use, call the issuing companies to cancel them.


This article was prepared by Broadridge.

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