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People think opening a credit card is bad for your credit score, but that's a myth — using it responsibly can actually make your credit better

Business Insider logo Business Insider 12/19/2019 Sarah Sharkey
a laptop computer sitting on top of a table © Crystal Cox/Business Insider
  • A high credit score can open lots of doors, from getting you more favorable interest rates to helping you get approved for mortgages and other loans.
  • It's a commonly held belief that credit cards are bad for your credit score, but in fact they can actually help boost your score in the long run - the key is to use them responsibly.
  • The two biggest factors that determine your credit score are payment history and credit utilization.
  • As long as you're not spending more than you can afford to pay off each month and you make your payments on time, using credit cards can have a positive impact on your credit score in the long term.
  • See Business Insider's list of the best rewards credit cards you can get »

An excellent credit score can open doors. The three-digit number that determines your creditworthiness can affect your interest rate and application approvals for loans of all kinds. Whether you want to secure a low interest rate on your mortgage or receive the best available offer on your next auto loan, a good credit score can be your ticket to success.

Since credit scores can be so important, you may have your doubts about opening a new credit card. Opening a new credit card can help you earn a sign-up bonus of points, miles, or cash back, or take advantage of an introductory APR offer to pay down a large purchase, but it's a widely held belief that credit cards can also wreak havoc on your credit score.

Luckily, though, this isn't true; in fact, using credit cards responsibly by paying your balances off in full each month can actually improve your credit score in the long run.

Will a new credit card affect my credit score?

The mere act of opening a new credit card should not affect your credit score dramatically. It may drop a few points when you initially open the card - because the hard inquiry a credit issuer will pull on your credit report does have a small effect on your score - but it will rebound quickly if you make on-time payments.

You should expect a drop of between 5 to 10 points due to the hard credit inquiry required when opening a credit card. 5 to 10 points will not significantly damage your loan application prospects in the immediate future.

In fact, opening a credit card and managing it responsibly can lead to a higher credit score in the long run. With this new credit card, you have the opportunity to make on-time payments and maintain a low balance. Take advantage of the chance to prove yourself to future creditors.

If you're still on the fence, consider the various factors that make up your credit score

Your credit score is made up of a variety of factors in your credit history. A new credit card application will have some effect on your credit score, but other factors in your credit history may have a bigger effect.

Here's what determines your credit score. The percentage indicates how heavily each factor is weighted into your score.

Payment history - 35%

On-time payments are absolutely critical to maintaining an excellent credit score. If you miss multiple payments, then you could face a big hit to your credit score.

Credit card utilization rate - 30%

Your credit utilization rate, also referred to as "amounts owed" or "debt-to-credit ratio," shows how much spending you are putting on your credit cards each month. Most experts recommend keeping this rate under 30% of your total available credit.

That means if you have a credit limit of $10,000 across all your cards, you'd ideally put no more than $3,000 of spending on your credit card. A lower credit utilization rate shows potential creditors that you can manage your credit responsibly.

Age of accounts - 15%

Older credit accounts are beneficial to your credit score. Choosing to keep older accounts open can help to keep the average age of your accounts higher. The length can show creditors that you have experience managing your credit without any problems.

Credit mix - 10%

More types of credit accounts can lead to a higher credit score. For example, a mortgage and two credit cards is a different type of mix than a mortgage and an auto loan. Lenders like to see variety in the types of credit you can effectively manage.

Hard credit inquiries - 10%

A hard credit inquiry, which happens when you apply for a new credit card or another type of loan, can cause your score to drop a few points. This is especially true if you have a lot of hard inquiries in a short amount of time.

How to manage your credit cards responsibly

It's completely possible to maintain a high credit score while enjoying the benefits of multiple rewards credit cards - just ask Personal Finance Insider contributor Holly Johnson, who has 26 credit cards and a credit score above 800.

The most important part of managing your credit cards responsibly to pay your balance in full each month. The key is to use a credit card like a debit card, which means never spending more than you can afford to pay off. If you need to carry a balance, rewards credit cards probably aren't for you - you'd be much better off choosing a card with a balance transfer offer and/or an intro APR offer so you can pay down your debt while avoiding mounting interest.

Read more: 4 signs you probably shouldn't be using a credit card

The other key aspect to using credit cards responsibly is to make on-time payments As you ramp up your travel rewards game, you may have more credit cards to keep track of. I highly recommend setting up an automatic payments for each of your credit cards. Even if you plan to log in and pay off your card each month, it's entirely possible to forget a due date. After all, we are only human. I've been saved by an automatic payment more times than I care to admit.

Which rewards card should you start with?

Say it again with me: A credit card will not destroy your credit score if you pay off your balance in full each month and never spend more than you can afford to. In fact, if managed responsibly, a credit card can be a tool to improve your credit score.

If you're able to use credit responsibly, you can reap the rewards of cash back, travel points, or airline and hotel rewards.

Here are some of our top rewards credit card recommendations:

Learn about more of the top rewards credit cards for every type of user »
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