Credit cards are convenient and can provide more flexibility in your monthly spending, but they’re also great for establishing and improving your credit.
You probably already know that using a credit card carefully and paying your bill on time without fail can build your credit score, which is increasingly necessary to rent an apartment, buy a home or purchase a car. Strong credit earns you lower rates on home loans, car loans and auto insurance.
Here are three other ways credit cards can help you improve your credit.
1. Create a Credit History
If you’re new to the credit world and haven’t established a credit history, a secured credit card can be a simple way to get started, but there are some things you should be aware of. First, secured cards often carry high interest rates and annual fees, so they’re not something you’ll want to use long term. The goal is to establish and build good credit, after which you’ll want to convert to a traditional credit card with lower interest rates and better terms. That card, too, when used responsibly, will help you maintain a solid payment history, which accounts for 35% of most credit scores.
Second, not all secured credit card issuers report to all three credit reporting agencies. So, for the purposes of establishing credit for the first time, you want to make sure the issuer you are considering does so. That way, you’re getting credit for managing the account responsibly. Remember, if it’s not in your credit reports, you won’t get credit for the account and it won’t help you establish and build great credit.
2. Decrease Your Debt Utilization
Your amount of debt, which includes your “debt usage,” (or “utilization”), accounts for roughly 30% of your credit scores. Getting a credit card with a high credit limit (or, even, raising the limit on an existing one) can be a good thing — assuming you don’t increase your debt in tandem — because it could ultimately result in a lower debt utilization. In general, the lower your balances relative to your credit limit(s), the better. Credit experts suggest keeping this ratio below at least 30%, but if you are trying to improve your score, you may want to aim for no more than 10%.
If you are carrying debt on cards, using a credit card payoff calculator like this one can help you determine how long it will take you to get out of debt — which, in turn, should help improve your credit utilization and your scores.
3. Adds to Your Mix of Accounts
The types of accounts you have on file (or your “credit mix”) accounts for roughly 10% of the points in your credit score. Revolving accounts, like credit cards, are those that have a different payment each month depending on your current balance. Installment accounts, like a mortgage or auto loan, are those that have a fixed payment for a fixed period of time. And open accounts, like a charge card, are a hybrid of installment and revolving credit —the payment is not the same each month and it’s usually due in full at the end of each billing cycle.
Consumers with the strongest credit scores tend to have a mix of different types of accounts. So, if you only have a student loan appearing on your credit report, for instance, adding a credit card could help improve your score.
Of course, credit cards will only help your credit if used responsibly: it’s a good idea to pay all your bills off on time, keep debt levels low and avoid applying for too many in a short window. (Each credit card application generates a hard inquiry on your credit report, which could ding your score.) You can see how your credit card use is affecting your credit by viewing your two free credit scores each month on Credit.com.
More on Credit Cards:
- Credit.com’s Expert Credit Card Shopping Tips
- An Expert Guide to Credit Cards With Rewards
- How Credit Impacts Your Day-to-Day Life
Image: Ilya Terentyev