Credit cards are a handy tool for paying for your purchases quickly and conveniently. And if you’ve picked the right card, they’re also great for racking up rewards – after all, why not earn points or miles on your day-to-day spending?
But did you know that your credit card could also be just the ticket to a great credit score? Here’s why:
1. You’ll have an opportunity to improve your payment history
Thirty-five percent of your credit score is determined by your track record with making on-time payments on your bills. Compared to the other four factors that determine your score, payment history is the largest, so it’s important to prioritize paying your obligations by their due dates.
This is where your credit card comes in. By using it regularly and paying off the charges by your bill’s due date every month, you’re adding positive payment history information to your credit report. This could go a long way toward boosting your credit score, assuming that you’re paying all your other bills on time, too.
Note: You don’t have to pay off your whole outstanding balance every month to get positive marks for payment history – technically, you only need to make an on-time minimum payment. But carrying credit card debt could damage the portion of your credit score that’s determined by amounts owed. To be on the safe side, make sure your credit card payments are made on time and in full.
2. You’ll be able to show a long history of responsible credit use
Fifteen percent of your credit score comes from the length of your credit history. Lenders like to see a long, strong history of responsible credit use, which is why this factor makes up a sizeable portion of your score.
But the tricky thing about length of credit history is that it’s impossible to reach into the past and change your prior decisions about interacting with credit. If you shunned borrowing money as a young adult, it will be tough making up for lost time.
On the other hand, getting a credit card as soon as you’re able to and using it responsibly is one of the easiest and best ways to start establishing credit early. By the time you’re ready to apply for a mortgage or other large loan, you could have years of solid credit history under your belt if you take the opportunity to build it when you’re young. Don’t underestimate the powerful role credit cards can play in achieving this goal.
3. You’ll improve the mix of accounts on your credit report
Ten percent of your credit score comes from the types of credit you have in use. Having both installment and revolving accounts on your report typically constitutes a healthy mix.
If you’re not familiar with the difference between installment and revolving credit accounts, examples of installment accounts include car loans and student loans. They’re repaid in the same amount every month over a specified period of time. Your credit card is a good example of a revolving account, which is used, repaid, then used again.
Opening a credit card and using it responsibly will add a revolving account to your credit profile, which is a nice addition to the installment accounts you probably already have. This mix of accounts shows that you’re able to handle different types of credit responsibly, and your score will reflect this if you continue to make on-time, in-full payments on all of them.
The takeaway: Although credit cards often get a bad rap, they can help you achieve good credit. Use the information above to get started with building a solid score today!