Revolving credit is a key component of your credit score because it provides insight into your credit usage, payment behaviors, and ability to manage ongoing debt. The most common form of revolving credit is credit cards, although lines of credit, such as home equity lines of credit (HELOCs), also fall under this category. Revolving credit impacts your score primarily through its effect on credit utilization and payment history, two of the most heavily weighted factors in credit scoring models.
Here’s a closer look at how revolving credit influences your credit score:
1. Credit Utilization Ratio (Amounts Owed)
- Credit utilization refers to the percentage of your available revolving credit that you are using at any given time. It’s calculated by dividing your total credit card balances by your total credit limits.
- Ideal Credit Utilization: A general rule is to keep your utilization below 30% of your total available credit, but under 10% is even better for maximizing your score. High utilization (above 30%) can negatively impact your score, as it may signal to lenders that you rely heavily on credit or are overextended financially.
- Per-Card Utilization: FICO and other scoring models also look at the utilization rate on each individual card. For example, if you have one card that is maxed out and others with low balances, it can still hurt your score due to the high utilization on that single card.
- Maintaining Low Balances: Keeping your balances low relative to your credit limits is one of the best ways to improve or maintain a high credit score. Even if you pay your balance in full each month, carrying a high balance from month to month can impact your score if your credit report shows a high utilization at the time of reporting.
2. Payment History
- Payment history is the most heavily weighted factor, accounting for about 35% of your FICO score. Regular, on-time payments on revolving credit accounts demonstrate financial responsibility and help build a positive payment history.
- Late Payments: Missing even a single payment on a credit card can have a significant negative impact on your score, especially if it’s more than 30 days overdue. Late payments remain on your credit report for up to seven years.
- Consistent Payments: Because revolving credit is an open line of credit, making consistent, on-time payments on your credit cards can help establish a strong credit history over time. Paying in full is optimal, but even making the minimum payment on time helps you avoid the negative effects of late payments.
3. Credit History Length
- The length of your relationship with revolving credit accounts also matters, as it contributes to the length of your credit history (around 15% of your score).
- Older Accounts are Better: Having a long-standing credit card that you’ve managed responsibly can positively impact your score by increasing your average account age. Closing a revolving credit account can reduce your average age of accounts and potentially lower your score over time.
- Keeping Accounts Open: To maximize the benefit of your revolving credit history, consider keeping older, well-managed accounts open, even if you use them infrequently, as they add to your credit age.
4. New Credit and Hard Inquiries
- When you apply for a new credit card or line of credit, it triggers a hard inquiry on your credit report, which can temporarily lower your score. This effect is usually small and only lasts for about a year, but multiple hard inquiries within a short period may cause more noticeable damage.
- Impact of New Revolving Accounts: Opening new revolving credit accounts reduces the average age of your accounts and can impact your length of credit history. Additionally, opening several new accounts quickly may be a red flag to lenders, as it can indicate an increased reliance on credit.
- Space Out Applications: To avoid negative effects from new inquiries and accounts, space out your applications for revolving credit, ideally only applying for new cards when needed.
5. Credit Mix
- Credit mix accounts for about 10% of your credit score and refers to the variety of credit types you have, including revolving accounts (like credit cards) and installment loans (such as mortgages, car loans, or student loans).
- Positive Impact of a Mix: Having both revolving credit and installment loans in your credit profile can positively affect your score because it shows lenders that you can responsibly manage different types of credit.
- Avoid Opening Accounts Solely for Mix: While a good credit mix can boost your score slightly, it’s generally not worth opening new accounts solely for this reason. Instead, aim for a balanced approach, where you use both types as needed and manage them well.
6. Impact of High Balances on Revolving Credit
- Risk Perception: Carrying a high balance on revolving credit can signal to lenders that you might be financially stressed, especially if it’s close to the credit limit. High balances reduce available credit, increase utilization, and are often viewed as a higher risk factor.
- Minimum Payment Trap: Making only the minimum payment on high revolving balances can lead to prolonged debt and interest charges, impacting both your financial health and, indirectly, your creditworthiness. While paying in full doesn’t directly increase your score, it helps maintain low utilization and reduces debt burden.
7. Behavioral Aspects of Revolving Credit
- Regular, Responsible Usage: Using your revolving credit regularly and responsibly by making purchases and paying them off demonstrates active credit management, which can positively influence your score over time.
- Avoiding High Balances and Debt Cycles: Revolving credit is flexible, but overusing it (especially to finance ongoing expenses) can lead to debt cycles and negatively impact your credit score through high utilization and interest accumulation.
Summary: How to Use Revolving Credit to Your Advantage
To make the most of revolving credit and its influence on your credit score, consider these tips:
- Keep Utilization Low: Aim to keep your credit utilization below 30% (preferably under 10% for a more positive impact). If you can, pay down balances before the statement closing date, so a lower balance is reported to the credit bureaus.
- Pay on Time: Make payments on time, every time. Set up automatic payments or reminders to avoid late payments.
- Use Old Accounts Occasionally: Keep older accounts open and active by making small purchases every so often, then paying them off. This maintains a long credit history and keeps the accounts in good standing.
- Avoid Excessive Applications: Apply for new credit only when necessary. Each new revolving account can lower your average account age, which may slightly impact your score.
- Check Your Credit Report Regularly: Monitor your credit report for accuracy, ensuring that all revolving accounts are reported correctly. Mistakes can harm your score, and it’s important to address them promptly with the credit bureaus if needed.
In summary, revolving credit has a substantial impact on your credit score due to its influence on credit utilization, payment history, and overall credit behavior. Using it responsibly—by keeping balances low, paying on time, and managing your accounts thoughtfully—can help you build and maintain a strong credit score over time.