5 Ways a New Credit Card Can Improve Your Credit Score
English: First 4 digits of a credit card (Photo credit: Wikipedia)
Did you know that opening a new credit card can help your credit score immensely, so long as you use it responsibly? Credit cards can be a double-edged sword, but so long as you use them responsibly and make on-time, monthly payments, they’re the most important tool you have when it comes to improving credit.
That said, opening a new credit card can go a long way towards improving your credit score and building your overall credit profile. Here’s five ways in which opening up a new credit card will give your credit score a nice boost in the long run.
1.) New credit accounts make up 10% of your credit score
Simply applying for and receiving a new credit account – in this case, a new card – makes up a tenth of your credit score. This makes sense since a new card will show creditors that you take using and improving your credit seriously.
The myth that the initial application for a credit card will hurt your credit score is actually true, since a credit pull will have a very small negative affect on your credit. However, once the account is open and you make your first payment on said card, you’re sure to see a small bump in your score that will only improve the longer you own the card.
2.) The types of credit used make up another 10% of your score
Another tenth of your credit score is determined by the types of credit you use. If you have various types of credit accounts attached to your credit profile, you’re showing lenders that you know how to manage different accounts responsibly.
For example, if you have one credit card available in your name and maybe an auto loan or student loan, you still might see a lack of improvement in your overall credit profile because, ideally, you want 3-to-5 different accounts open in your name.
Adding a second credit card might be helpful to diversifying your credit accounts and credit history.
3.) Add more credit to your profile
Did you know a full third of your credit score is related to the amount of debt you owe? This is called your credit utilization ratio, and it’s directly related to the amounts you owe versus the total amount of credit available to you.
In a perfect world, you would be using 10% or less of the total amount of credit available to you. That said, it’s especially important to keep that number below 30% since anything above could result in a drop in your score.
Opening a new credit card will automatically lower your credit utilization by adding a significant amount of new credit. It’s confusing sometimes all the jargon used when talking about credit cards, that’s why it’s good to reference a credit card glossary when you need to know the meaning of some word or phrase.
4.) Make a Balance Transfer
There’s another way you can lower your credit utilization ratio. If you’re paying interest on your old credit card, than it might be time to consider opening up a new 0% interest credit card for balance transfers . This allows you to start paying back your credit debt interest-free for up to 18 months. Pretty good deal, right?
The fee for such a transaction is small – generally 3% of the total balance you’re transferring – and the impact on your credit balance will be almost immediate. Interest fees are one of the primary reasons that credit debt can snowball and become a significant burden on the average consumer; it can be really hard to pay back your debt when your minimum payment hardly covers your interest fees.
Eliminate interest and begin lowering your credit utilization quicker with a balance transfer. And finally…
5.) Continue to make on-time payments each month
A full 35% of your credit score is made up from your payment history; on-time payments, multiple payments each month and avoiding default payments are the most important factors in building and improving credit.
Opening up a new credit card gives you another opportunity to prove your worth to creditors. Plus, as we mentioned earlier, it enhances your overall credit portfolio and shows lenders that you’re willing and able to manage multiple credit accounts.
Overall, one of the best things you can do to improve your credit score both short-term and long is to open up a new credit score. Even if you have poor credit, there are credit cards out there tailored specifically to building credit.
Make the new year the year in which you build your score with a new and improved credit card.
Share this:
Category: Credit Cards
