When used correctly, credit cards are one of the best tools available for building or improving upon your credit. They directly impact several factors that determine your credit score and are a good place to start if you want to make a positive change.
Here are four ways credit cards can help you build your credit score.
1. Age of Credit History
The length of your credit history, calculated as the average age of your accounts, makes up 15% of your FICO credit score. As your accounts age, they will positively impact this aspect of your credit. While a brand new credit card won’t help much, it will benefit your credit score over time.
If you have a credit card you don’t use anymore, you should think twice before closing it. If it’s an older account, it’s probably helping your credit score.
2. Credit Mix
Credit mix contributes to 10% of your FICO score; consumers with a healthy mix of revolving and installment account types typically have stronger credit scores. Revolving accounts, such as credit cards, have different payment amounts each month based on your current balance. Installment accounts, such as mortgages or student loans, have a fixed payment for a fixed period of time.
If you already have some installment accounts but you don’t have a credit card, getting one will help diversify your account types. While you shouldn’t apply to a bunch of credit cards you don’t need just to improve your credit mix, it will help your credit score if you need one anyway.
3. Credit Utilization Ratio
Your credit utilization ratio makes up 30% of your credit score. This ratio is simply the amount of available credit you have tied up in debt. For example, if you have a credit card with a limit of $1,000 and a $500 balance, your utilization ratio is 50%.
If your credit utilization ratio is too high, it can indicate that you’re having money troubles or you’re a risky bet for lenders. But if you keep your credit utilization ratio under 30% across all credit cards, you’ll be doing your credit score a big favor (ideally, you’ll pay all your credit card balances in full every month).
4. Positive Payment History
The single biggest contributor to your credit score is your payment history. Late payments or accounts in collections can severely damage your credit score. But keeping your credit card in good standing and making all your payments on time will contribute to a positive payment history.
Credit cards can go a long way toward building good credit, but only if they’re used responsibly. If abused, credit cards can severely damage your credit. To improve your credit score, you should make your payments on time, keep your balances low, and keep your accounts open.