A high credit score is a good friend to have.
A friend who can help get loans approved for you, put a roof over your head and keep it there.
From time to time, your scores, like friends, might seem fickle or capricious. But specific actions can keep them singing your praises and championing your reputation. And a major method involves the way you open credit card accounts.
Opening a New Account Can Elevate Your Financial Reputation
That’s right. Still, there’s more to say. Only open the new account if you have a strategy. Develop lifelong habits that follow your strategy, and you will, over time, raise and enrich the variety of credit you use. And this in turn will lift your scores.
What does the strategy involve? It involves understanding how much you’re allowed to use on your cards, how much you actually do use, and for how long.
Let’s unpack that, with pointers.
Rule 1. Go Easy on the Store Cards.
The next time you apply for a new retail store card, pause and reflect. This is not just about the 10% discount you’ll get on that fabulous patio set in the housewares section.
Store cards are known for sweet opening deals combined with low credit ceilings. That’s a risky combination, because the more you spend to get that discount, the bigger imprint you’re making on that card’s credit limit.
Which, in turn, affects your score.
The portion of your whole credit limit you use on the patio set becomes what’s called your credit utilization ratio. If your total charge on the card amounts to a big hunk of its credit limit, your credit score feels the pressure.
Conventional wisdom says to keep your balances below 30% of store and bank cards’ available credit. But do keep a balance, so you’re building your score. That means for every $1000 your credit card company allows you to charge on your card, only charge up to $300, max. Leave the rest of the allowance alone. Patience builds character (and your score). Sometimes, repainting your old patio furniture, or accepting your parents’ offer to let you have their set is the wise thing to do.
Rule 2. Age (Your Credit) Gracefully.
The day you open the store account and buy that irresistible patio set is the day your credit accounts’ average life gets shorter. Fifteen percent of your credit score is based on your credit age. Your credit age matters because it reflects your experience with credit cards. The older you get (with credit), the better you look!
Through the years, you acquire a personal history of credit. Today, it’s easy to give your credit a long, healthy life history. Just use the auto-pay option to stay on track, and at least pay your minimum balance every month without fail. This is the way you develop your payment history.
FICO® (the acronym stands for Fair Isaac Corporation, in case you want to impress folks at your next cocktail party) is the leading U.S. credit score provider. FICO’s are the scores lenders use most.
And FICO considers your credit age as worth 15% and payment history worth 35% of your credit score. This means age plus history equals half your FICO score.
Because we’re talking about averages, if you only have one or two accounts so far, the impact of getting one more card could be pretty significant. But if you have many well-seasoned cards, then, OK. You’re going to enjoy that patio all summer, so go for it.
Rule 3. Sometimes It’s Best Not to Poke the Bear
Hold on, though. There’s another factor. Not only do you set back your average credit account age, but you also trigger an inquiry on your credit report to get an approval for your new store card.
And so it happens that next quarter comes around and your stellar score report may take a dip (or a plunge).
What’s the big deal, you say? It’s only a markdown outlet! No matter. Inquiries by card issuers when they make their approval decisions constitute 10% of your credit score.
This means, depending on the totality of your credit situation, the new inquiry could cost you score points.
And just a few points can be all it takes to push a nice, low interest rate on a mortgage or other loan out of your reach. It doesn’t matter if the store approves or rejects your application; that poke can shake a few points off your score.
Rule 4. Score More, With Bank Cards
Another factor, amounting to 10% of your score, takes into account the different types of credit cards you carry. It’s called credit diversity. A mix of various types of cards, together with loans you pay in installments such as mortgages, will all enhance the diversity of your credit lines.
But all cards are not created equal. A new store credit card doesn’t carry the clout of a bank card. If you only have one or two major bank cards, then it does make sense to apply for another and start using it wisely.
The average person in the United States has three major bank cards. Now, you’re not going to be scored directly for your number of cards. But if you do have more than the average, and you’re paying the appropriate portion on all your cards’ balances on time, you can become a power user. You’ll have more overall available credit; and by using a portion of it carefully, you can optimize that credit utilization ratio (see Rule 1).
Do you have the strategy down? Then you’re becoming a high credit achiever. Congrats!
All Things (About Your New Credit Card) Considered
After reading through these pointers, you’re probably clear on the guiding principle for staying on the good side of the credit companies. The core of the matter? Never spend out ahead of your ability to make payments on time.
Your rating with FICO® is calculated from a wide variety of factors on your credit reports. Specifically, the score take into consideration five main kinds of credit information on your record. In order of importance, here they are:
- Your payment history: 35%.
- The total of all the charges you make: 30%.
- Your credit age: 15%.
- New credit cards: 10%.
- Credit diversity: 10%
As a percentage, opening your new card account looks like a small thing: only 10% of the picture. And yet, as you know from reading this full article, these factors interact. So, your score is about more than simply adding up percentages.
Your Credit Score Is Uniquely Yours
And you are in charge of your relationship with your score. To stay on its good side, take into account all the factors in your personal credit profile.
If you’re building credit for the long haul, a new card can help. If you’re trying to get a loan and don’t want any inquiries right way, though, hold off. That unbelievable store offer might not be there later, but a new store offer will arrive. Probably just in time for you to buy that new home office desk set you’ve been eyeing.
Dana George-Berberich is a freelance reporter and novelist. She has written finance articles for newspapers across the country and for companies like Dun & Bradstreet and Bankrate.
