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How can credit cards impact my credit score?

In general, owning a credit card is good for your credit score.  Simply opening a credit card will not help you build your credit history.  Making on-time payments and keeping account balances low relative to the credit limit are key to building your credit history.   Credit cards typically weigh more heavily on credit scores than other types of debt because they give greater insight into how you make borrowing and debt management decisions. 

One of the fastest ways a new credit card will help your score is by increasing your total available credit limit. Say you have one card with a $2,000 limit, and you’re using about $500 of that limit. That’s a 25% credit utilization rate, which is good, but it would be better if it were below 10%. Then you get a new credit card, and it comes with a $5,000 limit. That puts your utilization below 10% with a little room to spare ($500 balance / $7,000 total limit).

The thing to pay attention to here is to not abuse the higher credit limit. It’s definitely tempting to spend when you have $7,000 of available credit, but most experts recommend keeping your utilization below 30%, with below 10% being best.  You’ll want to look at your existing debt before turning to a new credit card as the way to improve your scores. You may want to reduce your spending and work on making timely payments on your existing debt to help raise your credit scores before applying for additional credit.

Over time, the best thing a credit card can do for you is establish a record of strong payment behavior. At the same time, a pattern of missed or late credit card payments will hurt your credit score.  Like all financial tools, credit cards can be really helpful, but they can also wreak havoc on your finances if you’re not careful.

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