Credit cards are among the best tools available for building or improving credit when used correctly. Several of these factors are directly impacted by them, making them a good place to start if you want to improve your credit score.
The following are four ways credit cards can improve your credit score.
1. Age of Credit History
FICO credit scores are based on your credit history, calculated as the average age of your accounts. As your accounts get older, this aspect of your credit improves. While a new credit card won’t help much right away, it will improve your credit score over time.
You should think twice before closing a credit card that you don’t use anymore. Your credit score is likely to benefit from an older account.
2. Credit Mix
FICO scores are influenced by your credit mix by 10%; consumers with a healthy mix of revolving and installment accounts tend to have better credit scores. Depending on your current balance, revolving accounts, such as credit cards, have different payment amounts every month. An installment account, such as a mortgage or student loan, has a fixed payment for a set period of time.
You can diversify your account types if you already have installment accounts but don’t have a credit card. If you need a credit card anyway, you shouldn’t apply for a bunch of cards you don’t need just to improve your credit mix.
3. Credit Utilization Ratio
Thirty percent of your credit score is based on your credit utilization ratio. It is simply the amount of debt you have incurred over your available credit. If you have a credit card with a limit of $1,000 and a balance of $500, your utilization ratio is 50%.
Credit utilization ratios that are too high may indicate that you are having money problems or you are a risky borrower. Nevertheless, if you keep your credit utilization ratio under 30% across all credit cards, you’ll do your credit score a big favor (ideally, you’ll pay off all your credit card balances on time).
4. Positive Payment History
The most important factor affecting your credit score is your payment history. Late payments can negatively impact your credit score. Making your credit card payments on time and keeping your credit card in good standing will contribute to a positive payment history.
In Closing
You can build good credit with credit cards, but only if you use them responsibly. Abusing credit cards can severely damage your credit rating. Your credit score will improve if you pay your bills on time, keep your balances low, and keep your accounts open.
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