Does a Line of Credit Improve Your Credit Score?

As long as you use it responsibly, a line of credit can improve your credit score.
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High credit scores are essential to buying a home, getting a new car, or obtaining any type of loan, but figuring out what will boost your credit score and what will hurt it can sometimes be confusing. For example, opening a new line of credit by obtaining a new credit card can be a double-edged sword that can sometimes improve and sometimes hurt your credit score.

Building Credit

FICO scores are the most commonly used credit score. They are based on the software by Fair Isaac and Company that produces them. Your score can vary among the three credit reporting agencies -- Experian, TransUnion and Equifax -- because they each use different criteria. Regardless of the reporting bureau, if you don’t have any credit at all, obtaining your first credit card is among the initial steps toward establishing credit and building your credit score. It’s important not to go crazy applying for credit cards, though. If there are excessive inquiries into your credit, it may appear as though you’re in financial jeopardy and lenders will be hesitant to extend any credit to you.

Timely Payments

A line of credit is no use to your credit score unless you can make your payments on time. According to an article by Liz Pulliam Weston, financial columnist for MSN Money, a late payment can lower a 780 score by 80 to 100 points. A mediocre score of 680 will drop by anywhere from 60 to 80 points if you pay late. A lower score can have a huge impact on the types of loans you can get and the interest you’ll wind up paying. Before you use a line of credit, make sure you know when the payments are due and set a reminder on your mobile phone if it helps you to make timely payments.

Low Balances

When you’re just starting to build your credit, it’s best to start small and limit the use of your new credit card to small charges that you can pay off every month. For example, only use the card to put gas in your car. Gas is an expense that should already be included in your monthly budget so making the payment won’t be difficult. If you need to keep a balance on your credit card, it’s best to keep it as low as possible. Your credit score will be negatively impacted if you show high balances and low credit levels.

Stay Active

The length of your credit history will also help to improve your score. Once you have obtained a line of credit, you need to keep it active. If you discontinue using a card, the lender may also stop updating your records with the credit reporting bureaus. You may be carrying zero balances on your credit card but this won’t be as effective for improving your score as an active line of credit that you pay on time.

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