Credit cards can sometimes have a negative reputation, but if used wisely, they can be a beneficial financial tool to help improve your credit score over time. Although getting a new credit card won’t result in an immediate boost to your credit score, it can be a smart long-term strategy for building a strong credit history and achieving financial success.
One of the ways in which credit cards can help improve your credit score is by demonstrating responsible credit management. When you use your credit card responsibly by making timely payments and keeping your balances low, it shows lenders that you’re a responsible borrower, which can positively impact your credit score over time.
Additionally, using a credit card responsibly can help you establish a solid credit history. Lenders want to see a track record of responsible credit use, and having a credit card account with a positive payment history can help establish this.
Now here are 5 reasons why opening new credit card can boost your credit score.
1. It reduces your credit utilization rate
Your credit utilization rate, also known as your credit utilization ratio, is a significant factor that contributes to your overall credit score. It measures how much credit you’ve used compared to your overall available revolving credit.
It’s generally recommended to keep your credit utilization rate below 30% to maintain a healthy credit score. This means that you shouldn’t use more than 30% of your available credit at any given time. Lenders view borrowers who consistently use a high percentage of their credit limit as risky, and it can negatively impact your credit score.
A lower credit utilization rate can improve your credit score, and using credit responsibly can help achieve this. If you don’t spend too much on your credit card and make payments in full every month, you can keep your credit utilization rate low, which can positively impact your credit score over time.
2. It boosts your on-time payment history
Your payment history plays a significant role in determining your credit score, accounting for approximately 35% of your total score. When applying for a significant loan, such as a mortgage loan, lenders prefer borrowers who have consistently made timely payments in the past.
If you have a limited payment history or even if you have a long one, making regular payments on a new credit card is a reliable method to demonstrate your creditworthiness and boost your credit score. This is because credit bureaus like to see that you have a consistent payment history, so if you regularly make on-time payments on a new credit card, it can help you establish good credit habits and demonstrate your reliability to lenders.
3. It diversifies your credit mix
Your credit score is not just based on how much debt you have or how promptly you make your payments. It is also determined by the types of credit accounts you have. Having a variety of credit accounts such as credit cards, mortgage loans, car loans, and other types of debt can be better for your credit score compared to having just one type.
Having a diverse credit mix is important for your credit score. If you only have one type of credit account, adding a credit card to the mix is a simple way to begin diversifying. However, you do not want to have too many credit accounts, as this can negatively affect your credit score. It is all about finding the right balance between having enough credit accounts to demonstrate your creditworthiness and not having too many that it becomes difficult to manage your finances.
4. You avoid maxing out other credit cards
When you use up all the credit limit available on a credit card, it means you have maxed out the card. This causes your credit utilization ratio to hit 100%, which can lead to a significant drop in your credit score. If you find yourself in a situation where you are about to max out a credit card but still need a card for emergency use, one solution could be to apply for a new card. This way, you can regain access to a revolving line of credit and prevent the negative impact on your credit utilization ratio.
However, it is important to be cautious when using the new card. Focusing on paying down the debt on the original card while limiting spending on the new card could be a good strategy to avoid hitting the limit and harming your credit score.
By paying down the original card, you can gradually reduce your credit utilization ratio, which will have a positive impact on your credit score over time.
5. You can take advantage of promotional offers
Credit cards often come with attractive sign-up bonuses and promotional offers for new users. For example, they may offer a period of reduced or zero interest rates for a few months. Other cards may offer a cash-back bonus or additional rewards points if you reach a specific spending threshold in the first few months.
These promotional terms and rewards can make it easier for you to pay off your credit card balance in full and on time each month, which is crucial for establishing a positive credit history. Additionally, you may also enjoy some financial perks and rewards while using the card.
However, it’s essential to keep in mind that no rewards can make up for missed credit card payments, which can have a negative impact on your credit history for several years. So, ensure that you don’t let the excitement of earning rewards lead you to overspend or miss payments. Otherwise, your credit score may decline instead of improving.
