Does Getting A Credit Card Improve Your Credit Score?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Many people use credit cards to simplify payments. You don’t have to reach into your pocket at a local store or worry about an overdraft fee from your debit card. However, some people avoid credit cards because they don’t want to incur any debt. Credit cards have higher interest rates than many loans, but these financial products can strengthen your credit score. We will discuss how using a credit card can improve your credit and some risks to consider before getting started.

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How Getting a Credit Card Improves Your Credit Score

Credit card usage will influence multiple categories of your credit score. Using your credit card can increase your score over time. Opening a credit card and using it to make payments will impact your credit score in the following ways.

Credit Utilization

Credit utilization measures how much you have tapped into your credit line. If your credit card has a $5,000 credit limit and you have $1,000 in credit card debt, you have a 20% credit utilization ratio. Keeping this ratio below 30% will improve your score, but it’s optimal to have a credit utilization ratio below 10%.

Credit Mix

Your credit mix is a key category that impacts 10% of your FICO score. Taking more loans and revolving lines of credit provides a more diverse credit mix. The major credit bureaus want to see that you can manage multiple financial obligations, and it will help you get a better loan. A credit card strengthens your credit mix and will improve your score.

Additional On-time Payments

On-time payments are the best way to increase your credit score. Payment history makes up 35% of your credit score and shows lenders that you can keep up with expenses. Making on-time loan payments improves your payment history. On-time payments on student loans and mortgages will also improve your credit score.

Credit cards make it easier to build your payment history. For example, every purchase you make can increase your history of on-time payments and complement on-time loan payments.

How Getting a Credit Card Can Hurt Your Credit Score

A credit card can work wonders for your credit score and help you qualify for better loans. Lenders will look at your credit score before deciding how much to let you borrow for a mortgage. While a credit card can help you build good credit, it can hurt your score if you aren’t careful. Credit cards can hurt your score in the following ways.

Hard Inquiries on Your Credit Report

Every time you apply for a new loan or line of credit, you get a hard inquiry on your credit report. Hard inquiries allow creditors to analyze your financial health more in-depth. Hard checks make creditors feel more confident about entrusting you with financial products, but they will hurt your credit score. 

A single hard inquiry won’t devastate your credit score, and you’re only likely to lose a few points. It won’t take much time to make up ground, especially as you build a solid payment history. Hard inquiries become more worrisome if you apply for numerous credit cards and other types of financing simultaneously. You won’t have to worry much about a hard credit inquiry if you apply for one credit card and get approved.

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Length of Your Credit History

Your credit history’s length impacts your score. Borrowers with lengthier credit histories get higher credit scores. More experience makes a borrower more trustworthy to a lender. Opening a credit card gives you additional credit history. New credit cards will not hurt your score, but closing an older account can reduce your score by a few points. 

You should keep older credit cards open even if you do not use them anymore. The credit history will continue to bolster your score. Some credit card issuers will automatically close your credit card if it remains inactive long enough. Putting a single monthly subscription on an older credit card will provide enough activity to keep your account open.

Higher Balances

A higher credit balance will put you closer to your credit limit and raise your utilization ratio. Creditors will get nervous if they see a high credit utilization ratio, especially if it’s above 30%. A higher percentage indicates that it takes longer for the borrower to repay debts. A lender may be skeptical about giving out loans to people with high credit utilization ratios. You should only use your credit card for purchases you can quickly repay. Letting the balance accumulate can make it more difficult to get better loans when you need them.

A common trap is to only make the minimum payment. Although the minimum payment will protect you from additional fees, your credit card’s balance will remain high and increase due to interest. Credit cards have double-digit interest rates, and the debt can snowball quickly if you are not careful. If you avoid an excessive balance, you are less likely to fall into this trap.

You can also use a credit builder loan or another strategy to build your payment history. These financial products give you a low-risk alternative to improve your credit score. You can select a credit builder loan with a 12-24 month term and pay as little as $25 per month. Credit builder loan borrowers receive their loan proceeds after paying off the loan.

Not Paying What You Owe

On-time payments will strengthen your credit score, but late payments will have the opposite effect. Making late payments on your credit card will raise doubts about your ability to handle additional debt. A lender’s primary objective is to make money from borrowers who can pay the loan on time. This critical objective explains why payment history is the most important credit score category for your FICO score and VantageScore.

Credit cards defer payments on everyday purchases. You should monitor your finances and establish a budget to avoid overspending. Keeping up with credit card payments helps you avoid most of the pitfalls of owning a credit card. On-time payments remove the disadvantages and allow you to tap into the perks.

How Much a Credit Card Can Improve Your Credit Score

Opening a new credit card provides immediate benefits, such as a higher credit limit. The higher credit limit will improve your credit utilization ratio, and your credit history will gradually increase once you open your card. In addition, on-time payments and maintaining a respectable credit utilization ratio will strengthen your credit score in the long term. Credit score improvements vary, but if you pay your bill on time, your score will grow over time.

Consider a Credit Builder Loan Instead of a Credit Card

Credit cards help you build payment history, but they have substantial risks. Those risks manifest themselves when you fall behind on debt and watch it snowball. Consumers can choose a safer way to build their credit.

Self’s credit builder loans allow you to establish a strong payment history with low monthly payments. Self has 12-24 month loan terms with payments as low as $25/mo. You will get your money back for paying your credit builder loan. If you want to build your credit score faster, you can use Self’s X Large Builder, which comes to $150/mo over 12 months. You can visit Self’s website or download the app to get a credit builder loan.

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