Good credit can make borrowing money less stressful and cheaper. But if your credit isn’t great, you may be on the hunt for ways to improve it. After all, strong credit can help you take out loans, rent a place, and even lower interest payments. Using credit responsibly should help your credit, but does adding a credit card improve your credit score?
How opening a new credit card can affect your credit score
How you use your new credit card can either raise your credit score or quickly knock it down. When used wisely, you can see how credit cards improve your credit score. In determining your credit score, credit agencies consider five key factors. Your credit score breakdown includes your payment history (35%), the amount you owe (30%), the length of your credit history (15%), how diverse your credit portfolio is (10%), and how much new credit you’ve acquired (10%).
So how does your credit score go up?
Increase available credit
Credit agencies look at how much available credit you have, which is how much you can borrow when calculating your credit score. Available credit is the amount of credit you could use but haven’t. Your credit utilization ratio compares how much credit you have used with your total credit limit. The lower your utilization ratio, the more available credit you have to use.
A lower credit utilization ratio is a signal to a lender that you use your credit responsibly. Since your available credit influences 30% of your credit score, a lower credit utilization ratio plays a significant role when calculating your credit score.
When you add a new credit card, the total amount of available credit you have to use goes up. The additional credit can improve your score if you use the new card to improve your credit utilization ratio. But if you spend a substantial portion of your available credit, your score can quickly drop. Using 30% or more of your total credit card limit can negatively impact your overall credit score.
Diversify credit mix
Your credit score is impacted by how well you can manage multiple types of credit. Up to 10% of your credit score is affected by the diversity of your credit portfolio. A good credit mix may include car loans, mortgages, student loans, and credit cards. Your credit score takes a hit when your history is limited to just credit cards..
Opportunity to make consistent payments
Lenders want to be sure that you’ll pay back your debt, so it’s no wonder your payment history has the biggest influence on your credit score. In fact, 35% of your credit score is based on your payment history.
When you make it a point to pay your credit bill on time each month, adding a new credit card can improve your credit score. Just keep in mind that it only takes one late payment to bring your credit score down.
Credit card issuers make a hard credit inquiry on your credit when deciding whether or not to approve your application. A hard inquiry can lower your credit score. Too many hard inquiries, especially in a short period of time, can quickly drop your score.
New credit and hard inquiries make up 10% of your credit score. It’s a good idea to consider the impact of seeking more credit, since applying for a new credit card could drop your credit score.
Age of credit
Your credit score is influenced by how long your accounts have been open. The length of your credit history impacts 15% of your credit score. A longer credit history improves your score, as long as you remain in good standing with your accounts. Conversely, new credit or a shorter credit history can bring your score down. But your credit score will rise over time if you don’t miss a payment.
How to use a credit card to improve your credit score
Your spending practices determine how your new credit card will impact your credit score. If you are late with your payments or don’t control how much you charge on your cards each month, your new credit card may cause more damage to your credit score.
Setting up a household budget is a good way to control your spending and to make sure you have set enough money set aside to make your monthly payments. When you practice healthy financial habits, such as limiting how much you charge and always paying your credit card bills on time, your new credit card can improve your credit score over time.
Open a new credit card to improve your credit score
If your credit needs a boost, adding a credit card could improve your credit score. Opening a new credit card account helps if you use your new credit wisely. However, adding more debt to your credit portfolio is not a decision to take lightly. If you aren’t careful how you spend your money, your new credit card could quickly reduce your credit score. Your credit score could rise as you diligently pay your monthly bills. When you effectively manage how much you charge and pay up each month, your new card can improve your credit utilization ratio and bump up your score. A good credit score makes it easier to borrow money and land better interest rates.
Will getting another credit card help my credit score?
When used strategically, adding a new credit card can improve your credit score. Not only can the additional credit lower your credit utilization ratio, but timely payments can also raise your credit score.
Does being accepted for a credit card improve your credit score?
Lenders make a hard inquiry on your credit before accepting your credit card application, so your credit score may drop in the short run. But if your new credit card helps improve your utilization ratio and you make your payments on time, you will see that your credit score will go up over time.
How does your credit score go up?
When you get a new credit card, your credit score improves as long as you make your payments on time each month. And if you effectively limit how much credit you use each month, a lower utilization ratio can increase your credit score.