There are many reasons that you might want to seek out a new credit card. Maybe you want to earn rewards or receive a welcome bonus. But increasingly, people are seeking out a new credit card in order to improve their credit score.
A new credit card can help your credit score in several ways, yet there are several perils that you need to be aware of when applying for a new card. If you don’t avoid them, you could end up setting your credit score back.
For example, if you inquire about too many credit card accounts within a 12-month period, you could end up damaging your credit score. So be careful about the amount of offers that you look into.
Similarly, if you open too many new accounts at once, you could see a negative impact on your credit score. Conversely, if you close old accounts, your credit utilization rate will increase and thus your credit score will drop.
Most importantly, though, a new credit card comes with the potential for late payments. Any late payment can seriously damage your credit score and stay on your credit report for several years.
All that being said, when used responsibly, a new credit card can really help your overall credit score. Below is a list of reasons why.
One way in which a new credit card can help your credit score is because it allows you to build a good credit history. Since payment history makes up 35% of your FICO score and 41% of your VantageScore credit score, you can establish a strong payment history by opening a new credit card and always paying on time.
Furthermore, if you have a “thin” credit file, that is fewer than 5 credit accounts, you may run into issues when trying to qualify for a mortgage, open a cell phone account, or lease an apartment. Opening a new credit card will help with this.
Diversifying your Credit Mix
Installment and revolving credit accounts are the two main categories of credit accounts. Installment credit includes things like student loans, auto loans, and mortgages. Revolving credit includes credit cards and lines of credit.
One of the factors that credit scoring models such as FICO and VantageScore pay attention to is the mix of account types that you are experienced in managing. This is known as your credit mix (which is worth 10% of your FICO score and 20% of your VantageScore.) So another way in which a new credit card can help your credit score is that it could potentially add account diversity to your credit report, thus increasing your credit mix.
However, it is worth noting that adding a credit card to your report will only help your credit score if you have never had a credit card before. If you have other revolving credit cards on your report, you probably won’t receive a bump in your credit score.
Credit Utilization Rate
Another way in which a new credit card can help with credit score is by lowering your credit utilization ratio. Lower credit utilization means a better credit score.
Credit utilization is the percentage of your credit card limits that are currently in use. Since a new credit card comes with a new credit limit, the new account could mean a drop in your credit utilization rate, and thus a better credit score.
Although the best way to keep credit utilization low is by paying off credit card balances, this is often difficult to do. Therefore, a way of lowering your credit utilization score, at least in the short term, is by opening a new card.