If a credit card can help you build credit, then can having more cards help you build credit faster? It’s a question we’ve heard from a few people recently. A woman I’ll call “Lois” reached out to us on Facebook. She says she’s careful with her finances, and even though she has credit cards, she hasn’t been using them.
I have no credit history, and haven’t used any credit cards till now. I’d like to make sure I’m maximizing my credit score…Do I understand correctly that the best option to increase the credit score is to have as many credit cards as possible, using all of them, but using them only to a very small extent?
And an entrepreneur I’ll call “George” who recently located his startup from Canada to the U.S., wants to establish a credit history here. He started off on the right track by getting two secured credit cards, which he is careful to pay on time.
But when he recently received a pre-approved offer for another card, he wasn’t sure if he should go for it. “At this point, I’m trying to build up as much credit history as possible so despite the high interest rate, my inclination is to apply BUT I don’t want to not be approved,” he wrote in an email. “So I think my question is: Should I go ahead and apply? How likely am I to be approved based on this ‘tailored offer letter’?”
Easy Does It
It is a good idea to get and use credit cards to establish or re-establish credit. (Here’s how to build credit the smart way.) It’s hard to get a top credit score without a credit card, though not impossible.
But loading up on a lot of cards quickly won’t necessarily help establish credit faster, and it could potentially backfire. When it comes to credit cards, credit scoring models are typically looking at several things:
- Payment history: Are accounts paid on time? If not, how recent were late payments, and how many were there? Have accounts been paid on time recently (especially the past 24 months)?
- Debt usage: How close is the balance on each credit card to the credit limit? How close are the total balances when compared with the total credit limit? Low debt usage is best.
- New credit: How old are accounts? When was the oldest one opened? The newest one? What is the average age of all accounts? An older credit history is better.
Use What You Have
In Lois’ case, she already has a few credit cards, so now it’s time for her to put them to use to help her build a strong credit score. She can simply start using each card to buy things she’d purchase anyway and then pay them on time and in full each month. (Paying in full is not necessary for a good credit score, but it does allow her to avoid paying interest.) It really doesn’t matter how much she spends on each card; what’s more important is that her accounts show recent activity. It’s difficult to generate a credit score for someone who doesn’t use credit.
She is right to pay attention to her balances, though. Credit scores can suffer if balances start creeping above 20% to 25% of the available credit limit. If she wants to make large purchases, she can simply pay them off right away online rather than waiting until she gets a statement. Doing so should keep the balance reported to the credit reporting agencies low.
If she follows those steps — using the cards, paying on time and keeping balances low — she should see progress quite quickly, especially if her accounts have been open for a while.
Think Long Term
George’s situation, however, is a little different. He is establishing credit from scratch. He is off to a good start with two credit cards under his belt, and getting another credit card now probably isn’t necessary. However, his first two cards are secured credit cards, which means he has placed security deposits with those issuers. And eventually he is going to want those deposits back.
So getting an unsecured card isn’t a bad idea. It will also likely allow him to get a higher credit limit. With secured cards, credit limits are usually equal to the deposit, and so unless he has put up large deposits, his credit limits are likely limited. That means even small purchases can result in a high debt usage ratio unless he pays them off very quickly.
There’s another reason to get an unsecured card now if he can. As mentioned earlier, credit age is one of the five main factors that credit scores consider. And that factor is hard to fudge. Either you’ve had accounts for a long time or you haven’t. So if he gets an unsecured card now, it can start to “age.” (It’s important to understand that when he closes his secured cards his credit will still benefit from the age of those accounts. They don’t disappear.)
As for whether he will actually get approved for the card offer he received, that’s another issue. There will be another full credit screen once he responds, and he may or may not get the card at that point. As long as there is nothing negative on his credit reports, though, and he meets the issuer’s minimum income requirements, he probably has a good shot at it.
In terms of adding other credit references, anytime someone just has credit cards, it’s not a bad idea to consider getting some type of installment loan, whether that’s the auto loan or a small personal loan. This can improve the individual’s “account mix,” another contributing factor to credit scores. They can pay off that loan off in a few months to minimize interest charges if they choose
It would be smart for both of our readers — and anyone trying to optimize their credit — to get their free credit reports from all three bureaus to find out exactly what’s reported, and to have a benchmark they can compare against next year. It’s also a good idea to monitor credit scores for free each month to see how they change. (Here’s how to get your totally free credit score.) Hopefully changes will be in a positive direction.
More on Credit Cards: