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Around 200 million Americans have at least one open credit card account. And on average, people carry three different credit cards in their wallet.
Credit cards are a convenient way to pay for purchases. These little plastic (and sometimes metal) payment methods may also offer fraud protection and the ability to earn attractive rewards you can redeem for travel, cash back, and more.
Yet there’s another credit card perk that’s even more valuable than the benefits above. These accounts often come with credit-building potential. Here’s what you need to know about how to use a credit card to increase your credit score, and alternative ways to build credit as well.
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No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.
4 Ways a Credit Card Might Increase Your Credit Score
When you open a new credit card, the credit card issuer will likely report the account to the three major credit bureaus. Once the card appears on your credit reports, it can impact your credit scores in several ways.
Payment History
One of the primary factors that impacts your credit score with FICO and VantageScore is how you pay your bills. Payment history accounts for 35% of your FICO® Score. Adding accounts to your credit report and paying them on or before the due date could help you build credit over time (especially if you have a thin credit file).
Credit Utilization
Another factor that can have a significant impact on your credit score is your credit card utilization rate (aka the relationship between your credit card limits and balances). If your credit report shows that you use a low percentage of your card limits, your credit score could benefit from this good habit.
Adding a new credit card with a zero balance to your credit report may lower your overall credit utilization rate as well. This credit utilization calculator can help you crunch the numbers.
Length of Credit History
At first, a new credit card might hold you back in this credit score category since older accounts are better where length of credit history is concerned. But as your credit card accounts age, they could help your credit score improve.
Also, if you have a friend or family member add you as an authorized user on an older credit card account, you could potentially see some fast credit score improvement. Just make sure that the account has no late payments, low credit utilization, and that the card issuer reports authorized user accounts to all three credit bureaus.
Credit Mix
Credit scoring models like to see that you have experience managing different types of accounts. With FICO, 10% of the score comes from the “Credit Mix” category of your credit report. So, if your credit report doesn’t have revolving credit cards and you open one, your credit score might improve when the account shows up on your report.
How To Increase Your Credit Score Without a Credit Card
Credit cards have the potential to help you build better credit scores when you manage your accounts in a responsible way. In fact, whether you have one credit card or many, it’s possible to earn and keep a good credit score.
Yet there are also ways to improve a credit score that don’t involve credit cards. Perhaps you already have well-managed credit cards and you’re looking for additional credit-building strategies. Or maybe you’re nervous about using credit cards in the first place. In either case, here are some alternative credit-building techniques.
Credit Builder Loan
Are you building credit from scratch or trying to rebuild bad credit? If so, a credit builder loan could be worth considering.
With a credit builder loan, the lender holds the loan proceeds in a separate account. You make payments to the lender based on the terms of your loan agreement (often for around 12 months). The payments you make cover the principal balance of the loan, interest, plus any fees the lender charges. Once you make the final payment, the lender should release the loan proceeds to you plus any interest you may have earned (if applicable).
It’s wise to choose a lender that reports to all three credit bureaus. If you do, you’ll have an opportunity to establish payment history with Equifax, TransUnion, and Experian. Be sure to pay on time since late payments could hurt your credit scores rather than help them.
Other Loans
Other types of loans have the potential to help you improve your credit score too, depending on how you manage them. Student loans, auto loans, and mortgages could all help you build good credit over time if you make a habit of paying your credit obligations on time every month.
Yet it’s not a good idea to go into debt for the purpose of building credit alone. There’s nothing wrong with using an auto loan to finance a vehicle you need, but you shouldn’t borrow money just because you want to add a tradeline to your credit report.
Utilities, Phone Bills and Rent
Some types of accounts don’t typically show up on credit reports. Utility bills, mobile phone bills, and rent payments all fall into this category. So, if you’re paying these accounts each month, you might not be getting credit for those good financial habits.
As a consumer, you can’t add accounts to your own credit reports. Only data furnishers (e.g., creditors, lenders, etc.) can report information to the credit bureaus. But you can use third-party services to share information with the credit bureaus and ask them to add accounts to your credit reports on your behalf.
Experian Boost is an example of a free service that can add eligible utility, mobile phone, and rent accounts to your Experian credit report. There are also paid services you can use to add eligible accounts to all three credit reports at once.
When Should You Pay Your Credit Card To Increase Your Credit Score?
If you want to earn good credit, you should aim to always pay your credit card bills on time or early.
Credit Score Impact of Paying Your Credit Card On Time
On-time payments can help you establish a good payment history. When a credit scoring model reviews your credit history, it will search for any evidence of late payments or other derogatory payment activity. If no negative payment activity is present on your credit reports, you should earn the maximum number of points possible for that credit score category (based on your credit scorecard).
Credit Score Impact of Paying Your Credit Card Early
When you pay your credit card bill early, it might help you earn a higher credit score. Paying before the statement closing date on your account has the potential to lower the credit utilization rate that shows up on your credit report. Remember, lower credit utilization is better from a credit score standpoint.
Bottom Line
A credit card could help your credit score if you use it responsibly. (Tip: A good credit card budget can help.) But if you start to struggle with overspending or any other bad credit card habits, address the problem right away. Otherwise, that credit card account that had the potential to help your credit score might have a negative impact instead.
Find the Best Credit Cards for 2024
No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.
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