Whether you want to begin building credit or improve your credit score, a credit card can be a valuable tool. By signing up for a new credit card and using it responsibly, you can add depth to your credit history and prove your credit worthiness over time.
To get the most out of your new card – and use it to its full potential – you should first know how your credit score is determined. The most popular credit scoring method, the FICO scoring method, determines your score based on the following factors:
- Payment History: 35 percent
- Amounts Owed: 30 percent
- Length of Credit History: 15 percent
- New Credit: 10 percent
- Credit Mix: 10 percent
Credit Factors Explained
As you can see, your payment history plays the biggest role in your credit score, contributing 35 percent. Followed closely behind – and making up 30 percent of your score – is the amount of money you owe in relation to your credit limits. This number is often referred to as your "credit utilization." If you carry credit limits that equal $10,000 across several cards owe $3,000 on your credit card balances, for example, your credit utilization is 30 percent.
Making up 15 percent of your score is the length of your credit history, which is determined by considering the average age of your open accounts. Another 10 percent of your score is made up of "new credit," or the number of accounts you have opened recently. Last but not least is your "credit mix" – a category that considers the different types of credit you have and makes up another 10 percent of your score.
How to Use Credit Factors to Boost Your Score
While each person's credit history and profile is different, the same rules can help anyone improve their score over time. Here are some tips you can use to make the most out of your new credit card and push your score as high as it can go:
Pay all of your bills on time
Since 35 percent of your credit score is based on your payment history, it's absolutely crucial to pay all of your bills – including your credit card balances – on time. If you're worried you'll forget, write your due date on your calendar or set an alarm on your phone. Many banks also make it possible to set your credit card balances (and other bills) on auto-pay.
Keep your credit utilization as low as possible
Credit utilization makes up 30 percent of your FICO score, and for good reason. If your credit utilization is too high, lenders generally consider that an indication that you may have trouble repaying amounts you borrow in the future. By keeping your credit utilization low, on the other hand, you show lenders you are able to manage your credit responsibly.
Keep accounts in good standing open – even if you aren't using them
Since the length of your credit history plays a role in your credit score, it makes sense to keep old accounts open if they are in good standing. The more established accounts you have, the longer your credit history will appear. And that's true even if you aren't using these old accounts on a regular basis.
Don't sign up for every new credit offer you see
While opening a new credit card account can be a savvy move, opening several new cards at once can really ding your score. Try to open new accounts sparingly, and only get new cards or take out loans when you really need them.
Consider different types of credit to round out your credit profile
Even though your credit mix makes up just 10 percent of your FICO score, it's worth mentioning. This is one area where you may not have a lot of control, but it does help to be cognizant of the different types of credit you carry. In addition to a credit card, it can help to have other types of credit including installment loans and even a mortgage. You should never go into debt purposely to improve your credit mix, but you should be aware of how diversifying your credit could improve your score over time.
A credit card provides an avenue to improve your score through responsible use. When you use your card for regular purchases, pay your bill on time every month, and carry only small credit card balances or no balance at all, your credit score is bound to improve over time.
Once you find a card that meets your needs, it's best to begin building these positive credit habits early. The right card can make a world of difference in your score, but only if you use it the right way from the start.