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If you're thinking about opening a new credit card and are wondering whether it will help your credit score, the answer is yes—and no.
Applying for a new card can initially lower your score because the card issuer will do a hard credit pull when deciding whether to approve your application. Further, a new account can potentially work against your scores as it will lower the average age of your accounts. On the other hand, a new credit card can help your credit utilization, which is an important factor in your scores. A new card can help you in the long run, especially if you keep it open for several years and make payments on time, but you may feel some short-term pain.
How Does Opening a New Credit Card Affect Your Credit Score?
First, let's look at how a new credit card might help you improve your credit score:
- Increase available credit: Opening a new credit line increases your available credit, which can positively affect your credit score. The key is to keep the balance relatively low so your available credit stays high. This is known as your credit utilization rate, and it's best to keep your overall credit usage under 30%. For the best impact on your scores, keep your credit utilization as low as possible.
- Improve credit mix: Your credit mix refers to the different types of accounts you have in your credit file. There are many types of debt accounts and two broad categories: installment credit and revolving credit. Installment credit refers to loans you take out and repay a single time, such as mortgages, car loans and personal loans. Revolving credit refers to accounts you can charge a balance on, repay and reuse, such as credit cards and home equity lines of credit. Credit mix makes up 10% of your score, so opening a new credit card may be helpful if most of your existing accounts are installment loans. That said, avoid opening a credit card solely to diversify your credit accounts.
- Opportunity to establish strong payment history: Payment history comprises 35% of your credit score, making it the No. 1 influence on your credit. When you open a new credit line, you have a chance to build up a history of on-time payments by paying your bill by the due date every month.
Now that you know the possible perks of opening a new credit card, let's consider some ways it might harm your credit:
- Hard inquiries: When you apply for a credit card, the card issuer will do a hard inquiry (also known as a hard pull) to access your credit report. This allows lenders to take a look at things like your payment history and how much debt you're carrying. Hard inquiries stay on your credit report for two years, but they'll usually only lower your scores for a few months following your application, if at all. If you have good credit otherwise and you don't have too many hard inquiries on your report, applying for one new card shouldn't impact your scores severely, and might not affect you at all. It won't be held against your scores if your credit card application is rejected, but it's still a good idea to avoid unnecessary hard inquiries. Before you apply, do your research to find a card for which you're likely to be approved.
- Age of credit: The length of your credit account history comprises 15% of your FICO® Score☉ . That means that the longer your cards have been open, the more positive an impact they'll have. A new card reduces the average age of your credit accounts. Still, on-time payments and credit utilization play much bigger roles in your score than credit age, so it shouldn't necessarily deter you from opening a new account.
The bottom line is that opening a new credit card might cause your score to dip initially. But over the long term, it can help you improve your credit history and raise your credit score.
How to Use Your Credit Card to Improve Your Credit Score
If you decide to open a new credit card, it's important to be strategic about how you use it. After all, you want the card to help you build credit and develop an excellent financial profile. Here are some ways to do that:
- Make all of your payments on time. Because it's the biggest factor in your FICO® Score, it's important to get your payments in by their due date, every time. If your card issuer offers an autopay option, consider setting it up for at least the minimum monthly payment. Then you don't have to worry about owing a late fee or taking a hit on your credit score because you forgot to pay. You can make additional payments at any time.
- Pay off your balances each month. Carrying a balance month to month means you'll likely be charged interest. Your bill can grow quickly if you continue using the card while interest is accruing, so consider paying your balance if you're able. Doing so helps you avoid paying more than necessary, and it also keeps your credit utilization rate low. That's second only to payment history in terms of how it affects your FICO® Score, so it helps to be mindful of how much you're putting on your card.
- Or, keep your balances low. If you're unable to pay your balances in full every month, you can still aim to keep them low. You might stop using the card, or use it only for small-ticket purchases so it's easier to chip away at your balance. Then, if you're able to pick up some extra shifts at work or receive some cash as a gift, you can use it to pay down the balance and get back to $0 faster.
- Create a credit card budget. The deferred nature of debt can cause you to live outside your means if you don't stick to a plan to pay it off. Debt balances can increase quickly and so can the amount of interest you owe. To keep your payments manageable—and to keep boosting your credit score—avoid charging more than you can afford to pay in cash. That way, you'll be able to afford your payments and you'll build a consistent record of responsible card usage.
Should You Close Old Credit Cards?
If you have an old credit card that you rarely use, you might think the best option is to get rid of it. After all, why keep an account you never touch?
Reality is a little more complicated, though. When you close a credit card, you lose access to that credit line and your credit utilization can increase (since your total available credit will be lower). The overall age of your credit also drops, since that account no longer factors into your score. The result is that your score could actually decline in the months following your account closure. Because of that, you may want to keep your old accounts open if you plan to apply for new financing soon—a mortgage or car loan, for example.
However, there are circumstances in which it may be best to close the account, particularly if you aren't applying for a new loan or card anytime soon. If your card has a high annual fee or high interest rate, you may want to close it in favor of getting a more competitive card down the road. You might also want to close the account if you find that you're overspending on it and racking up more debt than you can afford.
How to Improve Your Credit Without Credit Cards
If you don't want to open a new credit card, there are still ways to increase your credit score.
- Get a credit-builder loan. With a credit-builder loan, a lender will open an account for you and deposit a set amount of money in it. You then make payments toward that amount on a monthly basis. Once you reach the deposit amount, the lender releases the funds to you (plus interest, if that's part of the agreement). The lender reports those on-time payments to the three credit bureaus (Experian, TransUnion and Equifax), enabling you to build your score. You can generally take out credit-builder loans for $300 to $1,000.
- Open a secured credit card. A secured credit card may have less strict criteria than an unsecured card, making it easier to access. Typically, you'll pay a security deposit to obtain a secured credit card, which often becomes your credit limit on the new card. Once the card is opened, you can use it the same way you would a traditional credit card. As long as the issuer reports your secured card account activity to the credit bureaus, on-time payments and low credit utilization can help you improve your credit.
- Become an authorized user on someone else's account. If you have a trusted relative or friend who has good credit, you might ask them to add you as an authorized user to their credit card. As an authorized user, your credit score will benefit from their good payment history. However, if you know they carry a high balance or occasionally miss payments, you may want to skip this option. If the account has derogatory marks, it won't help your scores.
- Get credit for on-time utilities and streaming payments. On-time payments for your utilities, phone and even streaming subscriptions can count toward your credit scores if you sign up for Experian Boost®ø. Experian Boost is a free service that allows you to get credit for regular bill payments and streaming accounts such as:
- HBO Max™
Whether you open a new credit card or not, there are always opportunities to establish a track record of responsible financial management. Being mindful of those opportunities will set you on the path to improving your credit score.