Credit cards have become so prevalent in modern life that it’s hard to imagine your life without one. Whether you only whip out your card for certain things, or use it every chance you get, there’s no denying that credit cards have become a necessity that the majority of people utilize to one degree or another.
But many people don’t realize that credit cards can be useful for more than just making a purchase quickly and easily. Credit cards, when used appropriately, can not only allow you to buy the things you need, but can help you increase your credit score. While it’s a good idea to wait until you have at least a moderate credit score before obtaining one, a credit card could be just the thing you need to bump your score up from good to great.
While there are several factors that influence your credit score, and your credit cards alone won’t be able to fix past mistakes, or cause your score to jump overnight, they can definitely be an excellent tool to help you. Here’s how:
Keep Your Accounts Open
Most people’s first instinct when they’re finished with a line of credit is to close the account. After all, why have your name attached to something that you’re not even actively using anymore? In reality, it might not be the best idea if you want to keep your credit score high.
One of the factors that’s used to calculate your credit score is your credit history, or how long you’ve had a particular line of credit. The saying in the finance world is that, “Old credit is good credit,” and that’s certainly true when it comes to credit cards. By keeping an account open, even if it’s not one you’re actively using, you’re giving the three major credit agencies more data to reference when they compile your credit score.
Credit utilization is not necessarily a dominant factor in your credit score, meaning you don’t actively have to be using that credit line for it to help you. If there’s already an established history, especially if it’s a good one, you definitely need to consider keeping it open. The only time you should consider closing a line of credit is if it has annual renewal fees, or it’s a line that has more bad history (late or missed payments) than good. Additionally, if you’re going to close a line of credit, close a retail line, such as a Kohls or JC Penny card, as opposed to a bank or gas card.
Increase Your Credit Limit Periodically
Another factor that plays into your cumulative credit score is the total limit of your credit, versus how much you utilize. As a general rule, the more available credit you have, but the less you use of it, the better your score will be. While you should never use it as an excuse to spend more than you can afford, increasing the credit limit on your credit cards can in fact boost your score.
To illustrate this with numbers, think about it like this: if the credit limit on your credit card is $1,000, and you’ve made $500 in purchases on that card this month, you’ve already used 50% of your limit towards your card. Card companies and credit agencies start to get nervous about you when you use 50% or more of your credit limit, and it will cause your score to drop. Conversely, if the credit limit of your card is $2,000, and you still spent $500, you’ve only used 25% of your limit, which makes you seem much more responsible, even though your spending habits didn’t change.
A word of caution before you instantly start requesting credit limit increases left and right: when you request an increased limit, your credit card agency may make a hard inquiry on your credit score. Usually, when a hard inquiry is made against your score, it causes it to drop anywhere from 5 to 20 points. To avoid this, only increase your limit one card at a time, and wait at least four to six months before requesting an increase again.
Have Different Types of Credit Cards
A final factor of your credit score that credit cards can help you with is your credit diversity. Credit diversity, as the name suggests, refers to the types of credit available to you. Examples of credit types include credit cards, personal loans, mortgages, and college loans. When it comes to credit cards, there are different types of credit cards to choose from, including retail, bank, and gas cards, as well as cards that offer different perks, like cash back or rewards point cards.
When you apply, and are approved, for different types of cards, it will help to diversify your credit portfolio, and by extension, your credit score. The reason that this is a factor is because it shows that you can handle the responsibility of managing different types of credit, and the various requirements that come with them. Even amongst credit cards of similar types, like retail credit cards, the requirements can vary widely.
For instance: a credit card from Kroger may have low minimum payments, but high interest rates. Conversely, a credit card from Best Buy might require you to pay higher minimum payments each month, but have comparatively low interest rates. Having and using both credit cards responsibility demonstrates to credit agencies that you understand your obligations as the card holder, know what you can and cannot afford on each card, and when you have to ensure your payments are posted.
As always, use caution before jumping to get too many credit cards all at once. Just as with requesting an increase to your credit limit, applying for a new credit card will require a hard inquiry on your credit score, docking you by several points. Wait four to six months between credit card applications to ensure you’re not having a degenerative effect on your credit score.