It might sound crazy, but getting a new credit card can help boost your credit score. If you’re trying to establish credit for the first time or improve upon past mistakes, this can be something to consider.
Benefits of Good Credit
Generally speaking, credit scores range from 300-850, according to Experian. Typically, a credit score of 580-669 is fair, 670-739 is good, 740-799 is very good and 800 and up is excellent.
If your credit score is 670 or below, lenders likely view you as an acceptable or lower-risk borrower, according to Experian. However, scores of 580-669 are considered subprime borrowers and anything under 580 can make it hard to get credit or — at least obtain a loan with good terms.
Of course, taking out a loan isn’t the only reason you need a good credit score. There’s many other benefits of having good credit, including the potential for better insurance rates — i.e., car insurance — qualifying to rent an apartment, ease of opening utility accounts, getting a cell phone without a security deposit and looking responsible to potential employers, according to Capital One.
How Getting a New Credit Card Can Help Your Credit Score
At first thought, it’s only natural to assume that opening a new credit card account will hurt your credit score. In fact, it probably will at first.
“A new credit card will typically reduce your credit score in the [first] couple of months, since the bank may pull your credit to decide whether to approve it, [but] it can help over time,” said Michelle Francis, a financial planner and founder of Life Story Financial.
Ready to find out how a new credit card can boost your credit score? Here’s three unexpected ways a new piece of plastic can actually improve your financial situation.
Increase Your Credit Utilization Rate
“A new card can increase your available credit and add to your credit utilization rate,” Francis said. “This is a measure of the total amount of credit you are currently using, divided by the total amount you have available across all credit cards.”
To maintain a healthy credit score, she said it’s important to keep your balance fairly low, so your available credit remains high. “The major credit reporting services recommend keeping your credit utilization rate below 30% of your overall available credit,” she said.
For example, she said if you have $10,000 in combined available credit across all your credit cards, you need to keep your balances below a total of $3,000.
“Paying your balance off on time every month will help you improve your score even faster,” she said. “An easy way to do this is to set up auto payment each month.”
Positive Payment History
Hopefully, you’re fully committed to making payments on time for your new credit card. Assuming you are, this seemingly simple act can work to your advantage.
“If you’re making regular, on-time payments on your new card, you’ll also be contributing to a positive payment history,” said Jonathan Petts, a bankruptcy lawyer and the co-founder and CEO of Upsolve, a nonprofit that helps clients through the bankruptcy process. “This is the single most important factor in your credit score.”
Improve Your Credit Mix
The different types of credit you have impacts 10% of your credit score, according to Experian. This involves two main debt categories — installment credit and revolving credit.
Installment credit consists of loans taken out for a fixed amount, such as mortgages and car loans. On the other hand, revolving credit refers to accounts that are charged, paid and reused, such as credit cards and home equity lines of credit.
If most of your credit is installment loans, opening a new credit card can be helpful, according to Experian. However, the credit reporting company advised against opening a new credit card just to diversify your credit accounts.
Ultimately, only you can decide if opening a new credit card is a good idea for your financial future. If you’re certain you’ll be able to make payments on time and keep your credit utilization rate below 30%, this might be a good way to help boost your credit score.
However, if you’re at all hesitant about being tempted to overspend with a new piece of plastic at your fingertips, it’s definitely better to avoid taking this step. The last thing you want is to end up with more debt and an even lower credit score, because your new credit card enticed you to spend more.
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