Credit Score
Financial planners widely recommend that it's best to keep your overall credit usage under 30 per cent. But can this help boost your credit score? Image Credit: Shutterstock

Dubai: A good credit score is the key to being able to buy a home or finance a car. But what if you don’t have an ideal score on account of not being able to pay back your dues on time in the past? If that’s the case, can a credit card then help you build back your score to optimum levels?

“A credit card is evidently the quickest way to build good credit,” said Rupesh Naish, a Dubai-based debt restructuring advisor. “Opening a new credit card raises your available credit, which can raise your credit score. The key is to keep the balance relatively low so your available credit stays high.”

The measure of how much credit you are using compared to how much you have available is known as your ‘credit utilisation rate’, and financial planners widely recommend that it's best to keep your overall credit usage under 30 per cent. “For the best impact on your scores, keep your credit utilisation as low as possible,” added Naish.

What would happen if you have zero per cent utilisation rate?
Financial experts are increasingly recommending that you don’t want to go above 10 per cent if you really want an excellent credit score. But what would happen if you kept credit utilisation rate at zero per cent?

Having zero per cent utilisation rate may not look as good as you might think, especially to credit card issuers. The reason being for credit card issuers a zero per cent utilisation rate would mean that you aren’t making any purchases on your credit card.

“While a zero per cent utilisation rate is better than having high credit utilisation, it’s not as good as something in the single digits. This is why it’s often recommended that you aim to keep your credit utilisation rate at 10 per cent (or below) as a healthy goal to get the best credit score,” Naish said.

Can a new credit card help improve your credit score?

When you open a new credit card, you have an opportunity to reduce your credit utilisation ratio because your credit (i.e. the amount available for you to borrow) is being increased, which improves your payment history, and this in turn provides a boost to your credit score.

If your credit report shows that you use a low percentage of your card limits, your credit score could benefit from this good habit. Adding a new credit card with a zero balance to your credit report may lower your overall credit utilisation rate as well. Here’s an example.

Let’s say you are carrying Dh1,500 balance on a credit card with a Dh5,000 limit and Dh6,000 on a credit card with a Dh10,000 limit would be 50 per cent overall utilisation. When you get close to maxing out your card, it’s a sign you’re at risk of being unable to pay back what you’re borrowing.

Stock - Credit Score
If your credit report shows that you use a low percentage of your card limits, your credit score could benefit from this good habit.

How a credit card turns useful in raising your credit score

By not overspending on your credit cards, you keep your credit utilisation low and you won’t run the risk of hurting your credit score. But how much can having a credit card help improve my credit scores over time?

“If you pay your credit card bill on time and otherwise manage your finances responsibly, you can rebuild from a bad credit score (300-639) to a fair credit score (640-699) in approximately 12-18 months,” estimated Rajesh Markara, an Abu Dhabi-based credit analyst.

“However, opening a new credit card essentially lowers the average age of your credit accounts. I would say for most people, the total impact is probably not going to be more than 10 to 20 points and probably shouldn't linger more than like three to six months.”

Can having more credit cards help your credit score?
While the number of cards you carry likely won't have an effect on your score in isolation, both Markara and Naish suggested that you avoid applying for several new credit cards at one time.

“Applying for several new credit cards at one time can negatively impact your credit score in the short term. But over time, and if managed properly, more cards – and thus a higher credit limit – can help you improve credit scores,” added Markara.

Bottom line

Your credit cards can either help or hurt your credit scores, depending on how you use them. Regardless of the number of credit cards you have, credit basics apply: Keep your balances low and always pay bills on time.

However, if you use your cards to pay for purchases that you then pay off right away, having more credit cards can result in a credit score increase, noted Naish.

“That's primarily because more cards result in a higher combined credit limit. If you use only a small portion of that limit each month, the credit scoring algorithms will reward you for responsibly managing credit.”

Markara reiterated that if your score is low because you don’t have much credit history or you’re just starting your credit building journey, you can boost your score within months. “It may take a little more time if your score is low from the amount of debt you have,” he added.