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3 ways a new credit card could increase your credit score
15.07.2024 - 17:04 / thepointsguy.com
For many reasons, you might be in the market for a new credit card. Perhaps you want the opportunity to earn a new welcome bonus or valuable rewards from your everyday purchases. And some people seek a new credit card to achieve a "good" credit score.
If you're applying for a credit card to improve your credit score, it's important to understand how the new account might affect you.
There are several ways a new credit card could help your credit score, yet there are a few pitfalls to beware of as well. Otherwise, opening a credit card could set your credit score back — either temporarily or in the long term.
Let's discuss three ways a well-managed credit card account has the potential to help your credit score.
Perhaps the biggest benefit you might receive from a new credit card is the possibility of lowering your overall credit utilization ratio. Credit utilization is a term that describes the percentage of your credit card limits that are in use. Lower credit utilization is better for your credit score.
A new credit card comes with a new credit limit. The new account could trigger a drop in your credit utilization rate if you already have other open credit cards with outstanding balances. This, in turn, might improve your credit score.
Of course, paying off your credit card balances is the best way to lower credit utilization. But if you can't afford to zero out your credit cards, asking for a higher credit limit or opening a new credit card might help you in the short term. You could also consider using a balance transfer credit card as a way to consolidate outstanding credit card balances and reduce your credit utilization at the same time.
Another way a new credit card might help your credit score is by allowing you to build good credit history. Payment history makes up 35% of your FICO score and 41% of your VantageScore credit score. Therefore, if you open a new credit card and always pay on time, the account can help you establish a strong payment history over time.
Additionally, you might benefit from opening a new credit card if you only have a few accounts on your credit report. When you have a "thin" credit file — fewer than five credit accounts — you could have trouble qualifying for a mortgage, leasing an apartment or opening a mobile phone account.
Related: Why paying off credit card balances is more important than ever
A new credit card might help your credit score by adding account diversity to your credit report. Credit scoring models like FICO and VantageScore pay attention to many details on your credit report.
One of the factors these scoring models evaluate is the mixture of account types you have experience managing, also known as your credit mix. Credit mix is worth 10% of
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