How can rewards cards affect your balance?

Rewards credit cards offer cash back, points or miles on your everyday purchases, but they also play an important role in your credit health. Depending on how you manage your account, these cards can either boost your credit over time or work against you. Understanding how rewards cards work is key to using them to your advantage.

How rewards cards affect your credit score

Understanding how rewards cards affect credit scores helps you use them as tools for financial growth rather than a source of debt.

Your credit score is a three-digit number that helps credit card issuers determine how likely you are to repay the money you borrow. Card issuers use your score to approve new applications, set credit limits, and set interest rates.

In the United States, the two primary credit scoring models are FICO and VantageScore. They each take similar factors, but weigh them differently.

FICO score distribution

FICO scores, developed by Fair Isaac Corporation, are used by most major lenders. Scores range from 300 to 850, with greater emphasis on payment history and amounts owed.

• Payment date (35%): Making payments on time is the factor that most influences your score.
• Debt amount (30%): This measures the amount you owe and your credit utilization percentage, or how much of your available credit you’re using. For example, a $300 balance on a $1,000 credit limit card has an utilization rate of 30%.
• Length of credit history (15%): This takes into account the age of your oldest account, your most recent account, and the average age across all accounts.
• Credit mix (10%): Having a variety of accounts shows that you can manage different types of credit.
• New credit (10%): This factor takes into account your recent credit applications.

VantageScore breakdown

The VantageScore, created by the three major credit bureaus, uses a similar range of 300 to 850, but weighs factors differently. It focuses a little more on payment history and considers credit and available balances as separate factors.

• Payment history (41%): The timing of your payments carries the most weight.
• Credit depth (20%): This factor takes into account the age and diversity of your accounts.
• Credit Usage (20%): It measures the ratio of your credit card balances to your credit limit.
• Last credit (11%): Reflects new accounts or inquiries you’ve recently received.
• Balances (6%): This is the total amount you owe across all credit cards and loans.
• Available balance (2%): This factor takes into account the total amount of credit available to you.

Rewards credit cards are revolving accounts, which means your balance rolls over from month to month. Like other credit cards, your account activity directly affects your credit score. This includes: payment timing, balances, and new credit applications.

Positive credit effects of rewards cards

When used responsibly, rewards credit cards can help you boost your credit over time, making it easier to get approved for credit in the future.

• Positive payment history: Making payments on time shows that you are a reliable borrower and benefits your credit score. Since payment history is the most important factor in both FICO and VantageScores, a consistent payment history can raise your score over time.
• Low usage: Using your rewards card frequently and responsibly can help you increase your credit limit. If you keep spending low on higher credit limit cards, increasing available credit can reduce your utilization ratio, which helps your credit score.
• Length of credit history: Keeping your rewards card open for several years will extend your average credit life. This factor rewards continuous use of the credit card over a long period.
• Diversify your credit mix: Adding a revolving account to existing installment loans (such as a student loan or car loan) can improve your credit mix, showing that you have experience managing different types of credit.

Negative credit impacts of rewards cards

On the other hand, mismanaging rewards credit cards can have lasting consequences, making it difficult to qualify for new credit and favorable terms in the future.

• Hard queries from new applications: Each new application creates a hard inquiry on your credit report, which can temporarily lower your credit score. Applying for multiple credit cards in a short period of time increases the impact on your score.
• Low average age of accounts: Even if you’ve been using credit for a long time, each new account lowers your average credit age, which can then lower your credit score. Apply for new rewards credit cards sparingly to limit the damage to your credit.
• High benefit from large purchases: Rewards cards may tempt you to spend more to earn points, but high balances can increase your credit utilization and lower your score. Even if you plan to pay in full, a high statement balance can affect your score.
• Missing or late payments: One late payment can significantly impact your credit score and result in fees that offset your rewards. Payment history is a major factor in both major credit scoring models.
• Credit mix: Having multiple rewards credit cards but no installment accounts can limit your credit mix, which slightly lowers your credit score.

Manage multiple rewards cards without hurting your score

Many cardholders run multiple rewards cards to maximize points and benefits, earning cash back on groceries, travel miles, and points on dining. However, juggling multiple accounts requires discipline and structure.

• Space out new applications: Applying for too many cards in a short period may result in multiple inquiries and lower your average credit age. Waiting at least three to six months between credit card applications can minimize the impact on your credit. Many rewards credit cards have application rules that limit the number of times you can earn sign-up bonuses or open new accounts.
• Use AutoPay to avoid late payments: Even one late payment can significantly impact your credit score. You can set up automatic payment for at least the amount due to ensure your payment is on time. Payment automation protects your positive payment history.
• Monitor your individual and overall usage: Individual and overall utilization rates affect your credit score. Be careful about charging a high balance on any of your cards. Try to keep each under 30% — ideally under 10% — by paying off your balances before your statement closing date, which is when most card issuers report balances to the credit bureaus.
• Maintain old accounts: If you’re paying an annual fee that’s not worth it, consider downgrading the card to a no-fee version instead of closing it.

Bottom line

When used strategically, rewards cards can do more than just earn points; They can help you build a stronger credit score. By understanding how they affect your credit, you can enjoy the rewards benefits without jeopardizing your score. With responsible use, your rewards credit card can pay off in more ways than one.