It’s well known that carrying too much credit card debt or missing credit card payments will hurt one’s credit score. Few people, however, are aware that credit cards also can be a great way to begin to build a credit history and that they can even help improve one’s credit score. Here are four ways in which credit cards can boost your FICO score.
1. Credit cards establish a credit history.
One component of FICO scores is the length of your credit history. Unfortunately, for people just starting to build their credit, this can be a Catch-22. It’s hard to get approved for a loan without a credit history. However, without a loan, they can’t begin to establish a credit history.
Credit cards break this deadlock, because they are easier to get approved for than other types of loans. Applying for a credit card is an easy way to begin to establish a credit history. Credit card accounts that have been open for five to ten years or longer are a great way to bolster the part of your FICO score derived from the length of your credit history.
2. Credit cards help you show that you can be trusted to pay off your debt.
The whole system of FICO scores is based on the assumption that people are likely to act in the future the way they’ve acted in the past. Someone who has made regular payments on their debt in the past and has never missed a payment is likely to continue to act like this in the future. In short, if the payment history on your credit cards shows that you can be trusted to meet your debt obligations, this counts as a positive on your credit score.
3. Credit cards allow you to demonstrate that you can handle credit responsibly.
As far as FICO scores are concerned, how much you use of the credit available on your credit card shows how responsibly you manage credit. If you go to town and rack up credit card charges you can’t pay off, it’s an indication that you, for whichever reason, rely more heavily on credit than is prudent. On the other hand, if you can keep credit card balances at around 10% of your total credit limit, it shows that you know how to budget and manage your finances. This will give your FICO score a big boost upwards.
4. Credit cards show that you can manage different types of debt.
A portion of FICO scores relies on the credit mix a person has. Having different types of loans, like credit cards, a mortgage, and an auto loan, will give your FICO score another push upward. It’s taken as evidence that you are financially savvy and able to manage different types of debt responsibly.
Of course, credit cards are a two-edged sword. If you keep credit card debt low and pay your credit card bills on time, having credit cards are a great way to increase your FICO score. Unfortunately, if you do the opposite, credit cards can also be a great way to ruin your credit score faster than you can say FICO.