Credit Building > Do credit cards improve your credit score?

Do credit cards improve your credit score?

Wollit Team3 minute read · Updated 16th September 2024

Credit cards are a popular financial tool that can help you manage expenses and build credit history. However, they don’t automatically improve your credit score. Here is how it works.

How is my credit score calculated?

Your credit score is supposed to be a number that represents how creditworthy you are. Lenders look at this score to figure out the risk of lending you money. A higher score indicates a lower risk, making it easier to secure loans, mortgages, and credit cards at good interest rates.

Credit scores are calculated based on several factors. Here are some of them:

Payment history: this is the most important factor, accounting for about 35% of your score. Making payments on time on youtloans and credit cards improves your score, while missed or late payments can harm it.
Credit utilisation: this refers to the ratio of your current credit card balances to your credit limits. A lower utilisation ratio (ideally below 30%) is better for your score.
Length of credit history: a longer credit history generally leads to a higher score, as it provides more data on your borrowing habits.
Types of credit: a mix of credit types (e.g., credit cards, loans, mortgages) can enhance your score.
Recent credit applications: multiple applications for credit in a short period can negatively affect your score, as they may indicate financial distress.

How can credit cards improve my credit score?

A credit card can improve your credit history because it works on all of the factors we just talked about:

It can show you handle debt: using a credit card responsibly helps establish a credit history. Lenders look for evidence that you can manage credit effectively, and a credit card is one of the easiest ways to demonstrate this.
It can improve your payment history: Regularly using a credit card and making timely payments can enhance your payment history, which is the most critical factor in your credit score.
It can lower your credit utilisation: If you maintain a low balance relative to your credit limit, your credit utilisation ratio will improve, positively impacting your score.
It can improve your credit mix: Having a credit card alongside other types of credit (like a personal loan or mortgage) can improve your credit score by showing lenders that you can manage different forms of credit.

However, in practice, all of these benefits happen if you manage your card well. A credit card can also hurt your credit score.

How can a credit card hurt my credit score?

While a credit card, in theory, can be a great credit-building tool, it can also hurt your credit score if you don’t manage it effectively.

Here is how this works:

If you often carry high balances on your credit cards, your credit utilisation ratio will increase, which can negatively affect your score.
If you accidentally max out your credit card limit, it can also hurt your credit score. You might also have to pay additional fees.
If you miss any payments, it can lead to late fees and a drop in your credit score. Remember: payment history is the most significant factor in your credit score calculation.
If you apply for too many credit cards in a short period, it can lead to multiple hard checks on your credit file, which again can lower your score.
And if you are tempted to shop too often using your credit card, you might find yourself in too much debt. This can both hurt your credit score (if the debt is more than what you can repay) and hurt other credit approval chances (since lenders like to see low debt-to-income ratios).

How long does it take to improve my credit score with a credit card?

Improving your credit score with a credit card can take time. Generally, you may start to see improvements within a few months of using the card responsibly. However, significant changes may take longer, especially if you are working to correct past mistakes.

Are there specific credit cards for building credit?

Yes, there are credit cards specifically designed for individuals looking to build or rebuild their credit.

However, these cards often have very low credit limits (about £200) and may charge higher interest rates (as high as 55% per year).

They can be effective, but you must be very careful when using them.

For a safer alternative, consider subscribing to a credit-building tool like Wollit.

Building your credit history with a credit card requires you to first buy things on debt and then repay them as soon as possible. With Wollit, you only need to pay a fixed monthly subscription. Wollit then reports this subscription as a loan repayment to the credit reference agencies.

This directly builds your credit history and improves your credit score – while keeping you safe from high interest rates, maxed-out credit limits, or the risk of more debt.