With a short credit history, you need to offset high utilization of a low-limit card
Dear Opening Credits,
I’m 21 years old with a limited credit history. I have had a car loan for about eight months, and a credit card for about six. I did have a small student loan that I paid off all at once about a year ago. Since I got my credit card, my score has gone up pretty fast. It’s around 711 now. I don’t use much credit, but the limit is only $500. I have been considering applying for a second card to increase my available credit. I always pay off the full balance at least once a month. Like I said, I don’t really NEED another card, but I am wondering if the boost to available credit would outweigh the inquiry. Thanks! – Beth
You are addressing two important parts of credit scoring, which are the length of a person’s credit history and credit utilization. However, your history may not be as short as you fear. While your car loan and credit card haven’t reached the year mark yet, that student loan you just paid off must have been taken out some time ago. You might have received that student loan when you first started college. That loan was listed on your credit files from the date it was granted, along with the recent payoff. That data is working in your favor.
If you stopped and held your credit scores where they are now, you’d be OK. Plenty of great credit opportunities would be open to you. But since you want to increase your scores, here are three ways you can do that:
1. Apply for a new credit card.
The most important reason to add a new credit card to your wallet is that it would add to your credit utilization. An additional credit card will provide more borrowing power. Because the credit limit on the card you have now is so low, charging up to or near to the maximum hurts your scores.
Another credit line would immediately fix that by broadening your utilization ratio. For example, if you charged $500 with your current card, your score would drop because your credit hit the limit. However, if you have a second credit card that allows you to charge $2,000, your overall debt would be far less when compared to the amount you can cumulatively borrow.
Regarding how the application for that card could affect your scores, you’re right to ask but don’t worry. After all, you can’t get any account with asking for it, and certainly lenders know this. They just don’t like to see a wild flurry of credit card inquiries in a short span of time, since it can be an indication that a person is desperate for money. One or two applications in a year, though? That’s not a big deal.
Check out the credit card deals that are in your current credit rating range and choose a card you like, preferably with a low interest rate and no annual fee. Assuming you have a steady job, you should be approved. You may see a few points shaved off your credit score in the beginning (due to the hard inquiry), but if you pay all your financial obligations on time and keep your debt very low, your scores will not just bounce back, but bounce up higher.
Assuming the new card you apply for has a higher credit limit, I would switch your charging to that card, while keeping your second card active by just charging a small bill, such as a gym membership or Netflix account, to it each month. Then, you can have that fee automatically paid by your bank each month.
2. Make multiple payments a month on your current card.
If you are not entirely ready to apply for a new card, there’s no rush. You can always counter high utilization on your current card by paying off the balance as soon as possible, instead of waiting for the due date. For example, you could choose to pay down the balance twice a month instead of once a month, or even every week, by paying online.
3. Ask for a credit limit increase on your current card.
Another option to try instead of applying for a new card is to wait another six months and then call your card issuer and ask for a higher credit limit. With a year of good payment behavior under your belt, the odds of your request being granted are high.
Once you have a couple of years’ worth of responsible credit card use on your credit reports, your scores will be even higher than they are now. Credit scores over the mid-700s are considered excellent. The great news is you’re nearly there.
See related: With low-limit cards, watch credit utilization closely, If your credit’s all grown up, ditch that $300 limit starter card