Should You Really Attempt to Improve Credit With a Credit Card?

Good credit is essential to getting approval for personal loans, mortgages, and car loans. While taking out a loan with a poor credit score is possible, it will often have a very high interest rate to make up for the potential risk a low credit-score borrower represents. This can add thousands of dollars to the amount you repay and put added financial pressure on an already strained budget.

Credit cards are a good way to establish a credit history or improve your credit score if you use them responsibly. Our guide will outline how to build credit with a credit card to improve your credit score and what you need to do with your credit card to reap the maximum benefits.

How Opening a New Credit Card Affects Your Credit Score

All three major credit bureaus use roughly the same criteria when calculating your credit score, including:

• The age of your credit history
• Your credit utilization
• Payment history
• Number of hard credit checks in a row

Opening up a new line of credit will always affect your credit score since it touches on most of these factors.

The Pros

Here are some ways in which opening a new credit card to build credit will have a positive impact on your credit score:

• Improved credit utilization rate: Your credit utilization rate refers to how much of your potential credit you actually use. If you’re constantly maxing out your credit cards, you’ll have a poor utilization rate, which will negatively impact your credit score. Opening a new line of credit adds to your potential credit. As long as you don’t max out the limit on the new credit card, it will improve your utilization rate and credit score.
• More diverse credit mix: A credit mix refers to the variety of accounts you have. Your debt typically falls into either installment credit (one-time loans) or revolving credit (recurring loans). Having a mix of both kinds of debt can benefit your credit history. Taking out a credit card to build credit may work if you have lots of installment loans but only a few lines of revolving credit.
• Opportunity to establish a strong payment history: The most important factor in calculating your credit score is your payment history. Showing that you can reliably pay off the debt by making your credit card payments is the best long-term solution to building an excellent credit score.

The Cons

While new credit cards have some advantages, they do have several short-term negative effects. Here are the two main ways in which new accounts lower your credit score:

• Hard credit inquiries: Credit card companies often contact the major credit bureaus to access your credit report. When they request the full report, the bureau will note the hard credit inquiry, which will lower your score for several months. While hard credit checks remain on your credit history for several years, they only temporarily lower your score and should not severely affect your overall rating.
• Decreased age of credit: The longer you have a line of credit, the more positive it looks on your credit history. Having an old credit card shows that you consistently pay it off and can handle revolving credit. Opening a new credit card will decrease the average age of your debt accounts, which contributes up to 15% of your overall score.
• The good news about the negative implications of opening a new credit card to build credit is that they are temporary. If you’re establishing a new credit history, a new credit card won’t interfere with the age of your credit. And a hard inquiry usually has a minor effect unless you’re shopping around for multiple lines of credit.

How to Build Credit With a Credit Card to Improve Your Credit Score

Credit cards are a double-edged sword. They can improve your credit score and establish a reputable credit history if used correctly. But credit cards also carry the temptation of borrowing more than you can pay back, leading to missed payments and poor credit utilization, which will harm your credit score.

Here are some best practices to keep in mind when opening and using a new credit card to build credit:

• Make your payments on time: On-time payments make up the bulk of your credit score, so keep your balances manageable and consider using autopay options. Some credit cards incentivize autopay by reducing your annual percentage rate (APR), which can lead to long-term savings.
• Pay off your balance each month, or keep it as low as possible: Credit card companies calculate interest at the beginning of each billing cycle. By keeping your balance at zero, or as close to it as possible, you avoid accumulating interest and affecting your credit utilization score.
• Use a budget to control your spending: The most dangerous thing about credit cards is their deferred nature. It’s easy to think, “I’ll pay it back later,” but that can lead to living outside your means and having your spending get out of control. Treat your credit card like a debit card—keep a positive balance and budget—to avoid the most common pitfalls of credit card debt.

Alternatives to Traditional Credit Cards

If you want a credit card to build credit but don’t think you can avoid the temptation of overspending, consider alternatives, such as:

• Secured credit cards: Secured credit cards work almost exactly like traditional credit cards but require a refundable security deposit to activate. If your secured credit card remains in good standing, you will be able to access the deposit when you close the secured credit card; otherwise, the lender will use the deposit to make up for any missed payments.
• Becoming an authorized user: If you have a family member or friend you trust, ask to become an authorized user on their credit card. This adds your name to the credit card and adds the credit card to your credit score, which can be a massive benefit if they pay their balance off on time.

For more information about how to best use your credit card to build credit, call Boost Your Score at 1-800-259-1270 today!