How Rewards Cards Can Affect Your Credit

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

How Rewards Cards Affect Your Credit Score

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

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

In the U.S., the two primary credit scoring models are FICO and VantageScore. Each considers similar factors, but weighs them differently.

FICO Score Breakdown

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

• Payment history (35%): Whether you make payments on time is the most influential factor in your score.
• Amount of debt (30%): This measures the amount you owe and your credit utilization ratio, or how much of your available credit you’re using. For example, a $300 balance on a $1,000 credit limit card has a 30% utilization ratio.
• Length of credit history (15%): This considers the age of your oldest account, newest 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 considers your recent credit applications.

VantageScore Breakdown

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

• Payment history (41%): The timeliness of your payments carries the most weight.
• Depth of credit (20%): This factor considers the age and variety of your accounts.
• Credit utilization (20%): Measures the ratio of your credit card balances to your credit limit.
• Recent credit (11%): Reflects the new accounts or inquiries you’ve recently had.
• Balances (6%): This is the total amount you owe across all credit cards and loans.
• Available credit (2%): This factor considers the total amount of credit available to you.

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

Positive Credit Effects of Rewards Cards

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

• Positive payment history: Making on-time payments shows you’re a reliable borrower and benefits your credit score. Since payment history is the most important factor in both FICO and VantageScores, a steady payment record can raise your score over time.
• Lower utilization: Using a rewards card frequently and responsibly can help you earn credit limit increases. If you maintain lower spending on higher credit limit cards, the increased available credit can lower your utilization ratio, which helps your credit score.
• Length of credit history: Keeping your rewards card open for several years lengthens your average credit age. This factor rewards long-time, consistent credit card use.
• Diversifies your credit mix: Adding a revolving account to existing installment loans (like a student loan or auto loan) can improve your credit mix, showing you have experience managing different types of credit.

Negative Credit Effects of Rewards Cards

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

• Hard inquiries from new applications: Each new application generates a hard inquiry on your credit report, which can temporarily lower your credit score. Applying for several credit cards in a short period of time increases the impact on your score.
• Lower average age of accounts: Even if you’ve been using credit for a long time, every 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 utilization from large purchases: Rewards cards may tempt you to spend more to earn points, but high balances can raise your credit utilization and lower your score. Even if you plan to pay in full, a high statement balance can affect your score.
• Missed or late payments: A single late payment can significantly impact your credit score and lead to fees that offset your rewards. Payment history is a key factor in both major credit score models.
• Mix of credit: Having multiple rewards credit cards but no installment accounts can limit your credit mix, slightly lowering your credit score.

Managing Multiple Rewards Cards Without Hurting Your Score

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

• Space out new applications: Applying for too many cards in a short period can lead to 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 how often 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 an autopay for at least the amount due to be sure your payment is on time. Automating payments protects your positive payment history.
• Monitor your individual and total utilization: Both your individual and total utilization rates affect your credit score. Be cautious about charging a high balance on any of your cards. Try to keep each below 30%—and ideally below 10%—by paying down your balances before the statement closing date, which is when most card issuers report balances to the credit bureaus.
• Maintain older accounts: If you’re paying an annual fee that isn’t worth it, consider downgrading the card to a no-fee version rather than closing it.

The Bottom Line

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