While virtual cards are gaining a lot of traction, there's still a good number of questions about them — the most popular one is whether or not a virtual card can affect your credit score.

Credit scores are essential for many reasons. A low score means you can have a difficult time taking out loans, buying cars, and renting or owning a home. It's evident why everyone wants to know if a virtual card can positively or negatively impact their rating. But before someone can answer that question, it's important to go back to the basics.

What is a credit score?

A credit score is a way for potential lenders to learn how likely you are to pay back a loan. As such, your credit score is based on your credit history. For example, a previous instance where you owed money and did or didn't pay it back in a timely matter would help dictate your credit score.

By knowing your credit score, lenders can adequately determine how much credit they want to extend to you and the interest rate they'll charge for that loan. This process makes it crucial for you to have a high credit score to ensure you get the best deal possible. But what exactly is a high credit score?

This is where the Fair Isaac Corporation (FICO) comes into play. The organization created the model for credit scores, and according to FICO, the maximum credit score you can have is 850. The lowest is 300. To get a better idea of where you fall, here is the average FICO score range:

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

Credit scores are straightforward, but that doesn't mean there aren't any misconceptions around them.

Common misconceptions about credit scores

Many people believe a financially healthy life equates to a good credit score, but a credit score is not a measure of your financial health, but your demonstrated history of paying back debt.

An example of this would be a person who doesn't want to accrue any debt, and therefore, has a healthy savings account. This person pays for everything, either with cash or a debit card. However, as a result of their healthy financial habits, their credit score is low because their number of bank and credit card accounts is slim to none. Even though this person is financially healthy, their lack of accounts is a negative sign to FICO, and that factor ultimately dings their credit score.

Why are credit scores so important?

High credit scores can become somewhat of a bargaining chip when you're trying to get a good deal on an interest rate or loan. With an excellent credit score, you can sometimes negotiate better terms. But unfortunately, poor scores can have the opposite effect.

For example, a bad credit score can lead to higher interest rates. According to Informa Research Services, who gathered many interest rates to conduct their recent study, consumers with a credit score in the 620s would pay $65,000 more on a $200,000 mortgage than someone with a score of 760 or higher.

While that news is hard to digest, the impact of credit scores doesn't stop at loans. Your credit score is also a factor when your auto or home insurance premium gets calculated. Low credit scores can lead to higher premiums, while high credit scores can qualify you for discounts.

Additionally, some employers can check their potential hires' credit reports before giving them a job. Many employers justify this controversial practice by saying it's a way to determine how responsible a person is, but this method can be very detrimental for hopeful employees who don't have the best debt and payment history.

Common ways to ding a credit score

There are several ways that you could negatively impact your credit score. While most of them are common sense, there are a few mistakes people may not even realize they're making.

1. Making late credit card or loan repayments

In today's fast-paced world, it is all too easy to forget to make that important payment. Typically, a couple of late payments won't have too much of an impact on your credit score, but eventually, those missed opportunities start to add up to a dinged score.

2. Reaching the credit limit

This might not seem obvious, but debt utilization — the amount of available credit you actually use — contributes to a credit score calculation. If you go over your credit card limit by 50%, your credit score will be affected.

3. Accruing credit card debt early in life

Typically, people get their first credit card in college, a time when financial responsibility may not be a priority. However, many people don't know that past credit card history can count for up to 35% of their credit score. If you received your first credit card in college and didn't make your payments on time, that error will stay on your record for as long as six years.

4. Closing credit card accounts

Closing a credit card account might seem like a good idea once you've paid off your debt, but unfortunately, this action can hurt your credit score. When you close a credit card, the amount of credit you have available is reduced, which affects your debt utilization ratio, and ultimately, hurts your credit score.

5. Paying rent late

Have you ever paid your rent late? Well, even when you have good reason to withhold funds, late rent payments can decrease your credit score if your landlord chooses to report you. If you fail to pay your rent within 30 days of the due date, your credit score will drop.

With all this in mind, you might be worried about venturing into the unknown with virtual cards, especially if you don't know how a virtual card might impact your credit score. But the good news is that a virtual card won't always affect your rating.

Can a virtual card affect a credit score?

The act of creating a virtual card will not affect your credit score at all. However, if you open an account with any financial institution that has the ability to create virtual cards, it's at the discretion of that particular institution to report to the credit bureaus.

This information means that the organization you go through to get a virtual card will determine if that virtual card can impact your credit score. With Privacy, your virtual card won't affect your credit score. A common misconception is that when you open and close Privacy cards, this could negatively affect your credit history. But given that Privacy is a separate entity apart from other financial institutions, these actions are held separately as well.

Will Privacy ever offer virtual cards that impact credit scores?

Right now, the concept of working with a credit bureau is anti-Privacy because it would require your consumer data to be aggregated without your permission. But eventually, we may find a creative way to have our virtual cards help people build their credit. The feature would just require you to opt-in so that we continue to be a pro-consumer company.

Ready to use a virtual card that's free for domestic transactions and has no impact on your credit score? Sign up for Privacy and start using your virtual card today.