Opening a Credit Card Can Actually Help Your Credit Score | ModMoney

Opening a Credit Card Can Actually Raise Your Credit Score

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Most of us are skeptical when credit card companies overflow our mailboxes with promised perks and bonuses. “Sign up for this card and receive a 50,000-point bonus!" "Apply now and get your first year’s fee waived!” (As if we don’t already get enough mailers for discounted pizza pies and cleaning supplies.) But let’s get back to the core question. Should we really be adding new plastic to our wallets? The reality is, opening a new credit card that fits your lifestyle can actually be a good thing. Here’s why.

Opening a new card can help your utilization, which has a major impact on your credit score.

The balance on your cards as a percentage of your total credit limit (aka, your utilization) makes up 30% of your credit score. This number is important because it shows creditors that you can responsibly manage your credit lines without overextending yourself.

Let’s say you have two credit cards: one has a $2,000 limit, and the other has a $3,000 limit. You have a balance of $500 on your first card and $1,000 on the second. Here’s how to calculate your credit utilization:

(Balance on Card 1 + Balance on Card 2) / (Credit Limit on Card 1 + Credit Limit on Card 2)

($500 + $1,000) / ($2,000 + $3,000)

=30%

In this example, you’re using 30% of your total credit limit. I would guide you to keep your utilization in the 20-25% range. So how do you get this number down? Let's go back to algebra for a quick sec. You can either decrease your credit card balance (the numerator) or increase your credit limit (the denominator). Let’s say you open a new credit card with a $2,500 credit limit. Assuming your balance across cards doesn’t change, this increases your denominator and lowers your utilization to 20%. Which is right where it should be.

But don’t open too many cards at once!

Each time you apply for a new credit card or loan, the issuer makes a “hard inquiry” into your credit history, which dings your score. While the impact is temporary and fairly minimal, don’t get carried away and apply for multiple cards, a mortgage, and a car loan in a short time.

So what Is the best credit card for me?

Be selective in the cards you open, and choose one that aligns with your habits and goals. If you are looking for a sustainable way to give back to your community, consider the Charity Charge World MasterCard to earn cash back for nonprofits. If you are a jet-setter who wants a return on travel and dining, consider the Chase Sapphire Reserve, which is the best travel rewards card on the market. If you are a beginner looking for a simple, no-fee card with cash-back rewards, the Chase Freedom or the Chase Freedom Unlimited are my favorite options.

The Bottom Line

Spending money on a credit card is a great way to earn cash back, travel rewards, and even boost your credit score. But only if you manage your credit responsibly! Carrying credit card debt, overspending, or disregarding your credit score can all be incredibly harmful to your finances. On the other hand, using your credit cards prudently will lead to healthy finances and a clean credit report.

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