Using a Credit Card to Help Your Credit Score

Credit cards are great to have when you want to buy something, and they can also come in handy when you need to finance a purchase. But even if you don’t need a credit card for these purposes, they can be an invaluable way to establish credit and improve your credit score.

A credit score is based on several factors, and nearly every one of them can be improved by having at least one credit card.

Payment history helps credit score most

According to the FICO credit scoring formula, the largest component of your credit score is your payment history. By making timely monthly payments to your credit cards, you can help to establish an excellent payment history, even if you avoid interest charges by paying your statement balances in full every month.

The next most important factor is the amounts owed. Here, cardholders need to be careful to keep their balances low, relative to the total amount of credit they have been extended.

The next most important factor is the length of credit history where, once again, having credit card accounts open and in good standing can substantially contribute to having a high credit score.

The last two factors, which only contribute to 10% of the calculation each, are the types of credit used and the new credit applied for.

Although having credit cards contributes to the types of credit used and can help your credit score, applying for many new credit cards in a short period of time will hurt your score. The damage is small and temporary, but will be outweighed by all of the other reasons that credit cards can improve the credit scores of cardholders.

Other ways credit cards can improve a credit score

Becoming an authorized user on someone’s else’s account is one way to help your credit score. When the primary account holder has excellent credit, the scoring models do confer some of those benefits to the authorized cardholder. Just note that authorized users are unable to redeem rewards, dispute charges, or report cards lost or stolen.

Another tactic is to keep credit card accounts open for as long as possible, even if you are not using them. So long as there is no annual fee, there is no cost to having an inactive account that builds credit history.

When there is an annual fee, many card issuers will waive it upon request. In addition, having an unused line of credit will lower one’s debt to credit ratio, for a given amount of debt.

Finally, most credit scoring experts recommend having several credit card accounts open at any given time. Credit cards are easy to apply for, but need not be used to accumulate debt. By having a few accounts open, you can increase your credit history at no cost.